Business Rates on vacant industrial – Where are we now?
This isn’t a commentary on the past performance of the industrial sector. Nor is it a forecast of what the future holds; there are many Investors Developers and Agents far better qualified to comment on market conditions. What we can talk to is where business rates fits in and how the odds might become less favourable over the next 12 months.
The industrial sector has held an unbeatable hand in recent years with continued rental and capital growth across the sector. Property owners have also benefited from favourable conditions when it has come to business rates on their industrial portfolios with the following tailwinds:
- For the period 2017 to 2023, business rates valuations were pegged against rental values as at April 2015. This meant low business rates costs, with values fixed back to a date prior to the significant levels of growth in recent years. Arguably the low occupational costs contributed to rental growth.
- Where industrial properties fall vacant, the owner benefits from 6 months empty relief compared to a less generous 3 months empty relief applied on all other property types. With strong tenant demand and low void rates, this 6 month relief period has often been sufficient for property owners to avoid any rates liability, in-between tenancies.
- Where void periods exceeded 6 months, owners often carry out refurbishment works significant enough in scope to seek a deletion of the rating assessment and removal of the rates liability often through to the point of re-letting. This follows the Supreme Court decision in “Monk v Newbigin” in 2017.
- Failing a complete removal of the rates liability owners could fall back on a rates mitigation scheme where a relatively low level of occupation for a 6 week period would trigger a fresh 6 month relief period.
This presented an environment where Investors could write into appraisals low levels of rates during void periods and low occupied rates costs for their tenants.
Less Favourable conditions going forwards?
It is well publicised that transaction levels are down year on year in 2023 compared to 2022 and that tenant demand is cooling. The outlook for business rates on industrial property also looks more challenging.
2023 Revaluation
The 2023 Rates Revaluation updated all Rateable Values to be pegged against April 2021 rental values. As a consequence the Valuation Office have applied significant increases averaging 27.8% across the whole industrial sector and 32% on distribution warehouses.
Earlier this month our expert team at Foreview took a deeper dive into the impact of the 2023 Revaluation across different parts of the industrial sector across the UK. Industrial Occupiers – The Impact of the 2023 Revaluation
Many occupiers haven’t felt the impact of these increases yet due to the way that the Government phases in increases in rates payable following a Revaluation. For many occupiers “transitional phasing” has capped the increase in rates payable at a 5% or 15% compared to their 2022/23 bills despite much larger increases in Rateable Value. From April 2024 the transitional caps step up significantly which means many occupiers will receive substantial increases when their 2024/25 rates bills start to land in the Spring. Whilst the supply v demand dynamic still remains in favour of owners it isn’t difficult to imagine a world in which this upward pressure on occupational cost has an an impact on demand, particularly at the smaller end of the market where occupying businesses are more cost sensitive.
Properties undergoing works
Following the 2017 Supreme Court case of “Monk v Newbigin” there has been a raft of cases that have gone before the Valuation and Upper Tribunals testing how far a scheme of works needs to go in order to render a property incapable of rateable occupation. Until last year every single one of those cases found in favour of property owners with the boundaries being pushed further and further.
Has the tide now turned? Two recent Valuation Tribunal cases, both relating to industrial properties, have been found in favour of the Valuation Office. One where very little work could be proven to have taken place within the warehouse areas and the second where the agent was unable to prove that the whole of the property was incapable of rateable occupation. Each case is of course taken on its own merits but the Valuation Office emboldened by these two decisions are now increasingly resistant to removing industrial property from the list even where a scheme of works is seemingly fairly extensive.
These decisions emphasise the importance of being able to demonstrate what works were undertaken and when. Equally important is the scope and sequencing of works to demonstrate that the whole of the property is incapable of rateable occupation at a point in time. The ForeView Investor and Developer team have vast experience of working collaboratively with owners to ensure the correct strategy is being employed on each void. Being involved at the outset of a project and working closely with the project team on the scope and sequencing of works is critically important to the outcome. Our team can provide direct and honest advice on the strength of any appeal.
An end to Temporary Occupation Rates Mitigation?
The Government is currently undertaking a consultation on Business Rates Avoidance and Evasion. The consultation closed for responses on 28th September and we now await the outcome. The ForeView team submitted a response, highlighting concerns with mitigation reforms, which we reviewed in another recent article Business Rates Avoidance and Evasion
The proposed changes such as extending the required occupation from 6 weeks to 6 months in order to reset the empty rates relief period would all make temporary occupation less viable, and potentially unworkable, if implemented. It is difficult to envisage many owners committing to handing over a unit to a “temporary” occupier for 6 month whilst pursuing their longer term letting strategy.
When the Rating (Empty Properties) Act 2007 was announced the empty rates relief periods of 6 months on industrial and 3 months on all other sectors was supposed to be a reflection of average void lengths in each sector. Clearly the tables have turned over the last 15 years and there are calls particularly from the retail sector to extend empty rates relief on vacant retail from 3 to 6 months.
With the Government and Local Authorities under increasing financial pressure it wouldn’t be a surprise if they implemented some or all of the proposed changes tabled within the consultation document and adjusted the empty rates relief periods and options for resetting this relief. This would undoubtedly limit the options available to property owners looking to limit their empty rates costs whilst potentially faced with rising void rates over the next few years.
Contact our expert Investor & Developer team to discuss any of the above topics further.
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