Simon Lloyd, Head of Industrial & Logistics at DTZ comments on void rates:
“The issue of the payment of rates on empty commercial buildings has gone quiet of late despite some high level campaigns a few years ago, but the issue remains of high importance and in many ways, increasingly so.
After a short ‘holiday’ of six months when no rates are paid on empty industrial buildings and three months for offices, owners or former occupiers are liable for full rates payment irrespective of their efforts to lease the buildings. In reality, business rates are a tax, similar to Council Tax on residential property. In opposition, both the Conservative and Liberal parties were opposed to this tax, but since coming into power, they have yet to do anything about it except for a marginal increase in the threshold of those small properties which are exempt from paying business rates. This may be, in some part, due to the higher than anticipated revenue raised by the initiative and the government’s requirement for income to finance public expenditure.
Void rates on commercial buildings are, in effect, a tax on the landlord’s or leaseholder’s failure to attract an occupier. Additionally, in the current climate, the continued lack of finance and a shortage of tenants have stalled speculative development with many developers being further discouraged by the potential burden of empty rates payments whilst they search for a tenant.
There are a number of reasons why this tax is flawed.
Firstly, tax should be levied on profit or income, but in this case, it is levied on failure, compounding a bad situation. No building owner intentionally leaves an occupiable building empty, regardless of whether it is an institutional landlord or a private business. If a building does not generate rent, there is no income from which the landlord can pay the tax. It is important to appreciate that many buildings are empty due to restructuring to reduce costs in order to survive and a tax does not help this strategy. If a tenant is paying business rates as well as rent on a surplus building, it represents a significant cash drain on their business.
Secondly, in the current commercial property market, buildings remain empty because there is an excess of supply and limited demand, irrespective of price. The argument that by increasing the financial burden of holding empty buildings will encourage greater price competitiveness is therefore flawed. Additionally, companies holding leases on empty and surplus buildings are tied into a rental commitment by their lease, a legally binding document.
Thirdly, institutional investors are often pension funds, and a tax levied on these funds when no income is generated reduces the amount of money available for the payment of pensions when many funds are already stretched.
Finally, the extra tax burden is acting as a deterrent to invest in building projects at a time when good quality buildings are in short supply, and this may well impact on the future competitiveness of the business.
It is important to remember that businesses don’t have the opportunity to vote in order to make their voice heard and in the current economic climate, and they need support not extra burdens. Whilst the government is understandably reluctant to lose this tax revenue, it has the opportunity to help kick start the recovery by offering a much needed respite to struggling businesses.”
