Tax Realty Consultant

IT might not the most sexy of subjects admittedly but it is keeping the property community awake at nights.

It has profound implications for the wider business community who carry surplus space, business bosses should take note because it’s a tax coming to your empty unit soon, April 1, 2008 to be precise.

In the 2007 Budget Gordon Brown announced the abolition of relief for business rates on vacant commercial property.

Currently empty industrial, warehouse and distribution property do not pay business rates. All other empty commercial property has a 50% relief rate.

This will raise something over £1bn of additional tax revenue per annum. There are winners – charities will have a zero rating along with amateur sports clubs under the proposals.

The Conservatives appear to have dropped their opposition to this proposal so it is more than likely to be passed in 2008.

The unconvincing fig leaf the Government has applied is that will bring back into use under- utilised property and make property more affordable.

The Department of Communities and Local Government in its consultation document Modernising Of Empty Property Relief wishes to see office rents in the UK reduce as they are one of the highest in the world.

This description reflects the West End and City of London markets, not the reality in Wales. They also wish to see a fairer system.

We must have missed the sustained outcry from the public, livid that industrial buildings are exempt from rates on empty buildings.

There has been little opposition to the existing system. They also wish to see the protection of greenfields from new development – what about brownfield regeneration, the tax also applies here.

The policy for hundreds of thousands of new homes that will have to be built partly on the greenbelt is at odds with this desire.

This tax extension does not fix a market failure or remedy a perceived inequity. The evidence is that there are certainly more units available than occupiers in South Wales with vacancy rates running at 12% or higher on industrial property.

Available floorspace is increasing to about 14 million sq ft. Market rentals reflect this fact, taxing the empty space will not improve take up.

Who would want to deliberately hold a vacant property? Landlords see vacancies as an unwelcome interim before leasing their unit.

Companies who have surplus space are trying to dispose of it. There are other significant bills attributable to void property such as insurance, security, utilities and maintenance.

Unless there is a very specific reason for keeping property vacant, it does not make sense.

So what are the implications of business rate modernisation? To start with business will be reviewing its assets to see where it can reduce exposure.

For those businesses who are struggling it is another burden, for those companies looking to expand including inward investors, another reason for caution.

It could also depress property values making investment in new property development less attractive. The problems in the American housing market have already led to a steep drop in UK commercial property values due to increasing lending rates and negative investor sentiment to property.

Appraisals for speculative schemes will carry additional costs, the “void period” post completion is already uncertain but now more costly. Schemes may now become unviable or delayed.

Property companies in Wales have reacted positively to a market that no longer requires large manufacturing bases of which there are disproportionately many in Wales, witness NEG in Cardiff, Sony in Bridgend and LG in Newport.

They have addressed the modern demand for higher value and smaller units – it has been a success story. The risk of acquiring massive vacant buildings for ambitious schemes is now greater. The dynamism of regeneration and redevelopment will be slower and harder to achieve.

Demolition (permitted) will be encouraged probably leading to drops in tax revenue over the medium term. Less favoured locations will likely see more of this.

The Wales Assembly Government has rightly created initiatives to see more business property in disadvantaged locations. This will now be less attractive to developers as the time taken to lease property is usually longer.

It is a tax within the remit of WAG. Interestingly the Scots have decided to stick with status quo. WAG has an opportunity to make Wales a comparatively more attractive place to invest in than the English regions – all the signs are that it is not going to take it.

CBI Wales and RICS Wales have lobbied WAG to consider concessions to the proposals or an extended grace period to allow transition.

The modernisation of empty property relief appears a victimless and faceless tax. It does however have underlying consequences. A tax on regeneration is perhaps overstating it but it will not make it any easier for our economy to compete.

http://icwales.icnetwork.co.uk/business-in-wales/commercial-property-wales/2007/11/21/faceless-tax-won-t-make-it-easier-for-economy-to-compete-91466-20137179/

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