Untie the commercial property market – and let us trade

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Ian Woods, DM Hall

Ian Woods, partner at the Hamilton commercial department of DM Hall Chartered Surveyors, comments:

Commercial property plays a crucial role in Scotland’s economy. The commercial built environment provides places for people to work, produce, eat, drink and for businesses to provide a comprehensive range of services.

The sector produces income for owners and investors which, in turn, generates tax revenue for local and national government. Government can then spend that money on public services which benefit everyone in the country.

So why, it has to asked, do so many people in the commercial property arena feel that they are being treated as an easy target by both Holyrood and local authorities? Why do they feel they are seen as the cash machine which just keeps giving?

Before anyone dismisses such sentiment as self-interested, it is reasonable to look at the justification for it. At the root of dissatisfaction is the hard fact that it now costs in most cases twice as much to own a vacant commercial property as it did ten years ago.

That is a consequence of a number of factors, but the body blows which have hit the sector in recent years have come so hard and fast that property owners sense that they are fighting a rearguard action in a war of attrition against them.

Last year the market was widely affected by the Scottish government’s limitation of the empty property relief which attaches to vacant industrial premises.  This valuable benefit was reduced from 100% relief from rates to 10% after six months, meaning that landlords face a 90% charge on non-earning buildings.

Its effect is widely predicted to be the same as in the vacant office market, which was devastated by similar curbs four and a half years ago.

Now, to pour salt in the wound, water and sewerage charges are to be levied from April 1 on vacant non-domestic properties which hitherto have been exempt from charges. They will now be billed as if they were occupied.

This new stricture will even apply to condemned or listed buildings. The argument is that, although vacant buildings may not produce goods, deliver services or generate income, they still benefit from Scottish Water services such as drainage of rainwater from roofs and car parks.

Many properties have also been hit by the recent increases in a rating revaluation which was already two years out of date by the time it was introduced – though it has to be said that, as in any revaluation, there have been winners and losers.

The Scottish Government has added the Land and Building Transaction Tax to the mix, further adding to the burden applied to residential and commercial land and buildings transactions, including commercial purchases and commercial leases.

A worry for professionals in the sector is that, at least anecdotally, ministers tend to say when asked why property legislation is so onerous that they are responding to advise which when analysed is at best misleading and in some cases quite simply wrong.

The message appears to be that ministers believe property owners are keeping buildings empty deliberately thereby restricting availability to tenants and occupiers. This is just false, and a fundamental misunderstanding of the market by an inadequately informed base of people.

Owners, in all but a very small number of cases, buy property in order either to occupy it or to have it occupied as an investment proposition. There is no profit in unproductive buildings.

But what we now see is a situation in which an office block may have two floors productively occupied, but one floor unlet – and the imposition of costs on the vacant floor wipes out all the profit generated from the occupied floors.

On top of all this, we now have a period of political uncertainty with the announcement of a surprise general election. Hopefully any effect of this will be minimal as the election takes place in early June. On the other hand, however, we also now have the worrying prospect of Indyref2.

Just three years into a pretty modest recovery we face jumping through the hoops of uncertainty for up to 2 years all over again. It’s the last thing the market needs, whether or not the case for independence is supported.

The commercial property sector has become used to a lack of official incentivisation over recent years, but it is disheartening to be operating in what appears to be an environment of positive disincentivisation and continued uncertainty.

The irony is that, despite all of the above, the market seems relatively busy with reasonable transaction activity and tolerable availability of funding. So just imagine what it would be like if government untied our hands and just let us trade.

It could be just what the country – independent or not – actually needs to stimulate the prosperity for which everyone wishes.