by Harvey Cole
The outcry over the uniform business rate was entirely predictable — another example of British business largely ignoring impending change until it actually arrives, and then hopping up and down in agitation. (I suspect that, in spite of all the publicity, most companies still think of 1992, if at all, as just another leap year.)
While it is certainly true that the UBR will have the most marked effects on shop property, most comment has, if anything, understated the short-term effect and exaggerated the impact in the longer run.
As a broad generalisation, retail premises have shown the greatest rise in rents, and therefore ratable values, since 1973. It therefore follows quite logically that shops, as a group, should carry a larger share of the total business rate burden following revaluation. Horror stories about multiplication of previous rate bills have too often been based on (a) simply looking at the new rateable value; (b) ignoring the fact that national groups like House of Fraser and Sears will have gains on the swings to offset highly publicised increases on the roundabouts such as Harrods and Selfridges; and (c) the effects of the phasing-in proposals.
Nevertheless, when full allowance is made for all these factors, the new system will have a number of adverse effects on the retail trade which have not yet been properly appreciated.
Limitations of phasing
Many retail premises face increases in rates payable of over 150% for larger businesses and over 100% in the case of smaller firms. As the “capped” rises of 20% and 15% compound respectively, they will therefore not have reached their new equilibrium levels after the five-year phasing period. (In addition, of course, rates may also be raised each year by a maximum amount equal to the pace of inflation measured by the RPI.)
The first question, therefore, is what will happen to any part of a rate increase which has not been phased in within five years. Some optimists are talking as if the remainder will, in some way, be commuted.
It is far more likely that 1994 will see any remaining adjustments carried into the single year at one fell swoop, because the present legislation provides for a further revaluation of commercial property in that year, and a new basis will therefore be needed for 1995 and beyond.
Cynics are already suggesting that, having evaded a revaluation for 16 years after 1973, the government of the day will be reluctant to face another upheaval in 1994. Against this, it can be argued that the Act makes a revaluation mandatory. But a Parliament cannot bind its successor, and it could well be that an administration facing an awkward election would push a small piece of amending legislation through to postpone the task.
On balance it would be wise to assume that a further revaluation will occur — on the basis that after a period of only five years the number and scale of any new anomalies should be containable.
Occupancy costs: short term
The effect of the new rates over the next four or five years must be to raise the real level of occupancy costs to retailers. That is of course a generalisation, and figures will vary sharply across the country. Nevertheless the trend to higher costs is quite clear — and is, if anything, emphasised by the proposals to phase in reductions as well as increases.
Retailers will therefore find themselves paying higher rates in addition to being locked in — for varying periods — to their existing rents. This will come at a time when the growth in the volume of retail expenditure is faltering.
However, the slowdown in consumer spending — which is still actually rising in real terms — is less important than the steady and growing pressure on costs and the erosion of both gross and net profit margins in retailing.
For many traders, the effect of the new rates will be of the order of 0.5% to 1% of turnover. That may not sound much, but it can absorb between a quarter and a tenth of net profit.
Competitive conditions will limit the extent to which prices can be raised in compensation. While the Government may welcome the braking effect of this on inflation, the result must also be to reduce buoyancy and expansion in retailing.
Two specific areas can be singled out where this will apply particularly. First, it appears that rateable values for out-of-centre superstores and retail warehouses have undergone a more than proportionate increase. The same will be true of new sites developed for these uses. To that extent there will be a small but definite shift of emphasis back to town-centre shopping unless developers are prepared to absorb all or much of the differential rise in rates in their rental charges or profits.
On the other hand, new shopping development in town centres will immediately be caught by another element of the new system: premises occupied for the first time will have rates levied at the full new amount with no phasing in at all.
Unless asking rents are reduced, traders will therefore face higher occupancy costs than would have applied under the old arrangements — and this will be true all over the country, and not just in areas where relative values have increased.
(There is also a potentially nasty problem in changes of use or name in existing premises. Most local authorities are proposing to treat even a change in the type of business carried on by a trader or a change of ownership — for example, through a takeover without any change of trading name — as constituting a new occupancy and thus attracting the full new UBR at once.)
Rent bargaining
As time goes on the impact of UBR seems certain to lead to pressure to try to secure smaller rent increases, and even downward revisions. The estate agency world is extremely clever at arranging deals which accept commercial reality while preserving the illusion that values are on a never-ending upward escalator. But it will need all its ingenuity as rent reviews start to flow in under UBR. Before very long, pleas are likely to flood into the Office of Fair Trading to the effect that a system of upward-only rent reviews is contrary to public policy and public interest.
However the problem is handled, and whatever face-saving formulae are found, it must be the case that the next few years will see a larger proportion of shop occupancy costs channelled into the public sector through UBR and away from landlords and developers. At this stage retailers are also likely to feel a substantial squeeze, and retail development seems certain to be slowed down on both the demand and the supply sides.
Beyond equilibrium
Once the new system has been fully brought in, the balance will shift quite strikingly — a point which has so far not emerged because attention has been concentrated on 1990 and 1991 to the exclusion of the years after 1994.
When UBR has been phased in, it will be linked to a figure that cannot be raised by more than the annual amount of inflation. Central government will set the figure. (It is not yet clear if it is the total revenue or the poundage which will be restricted: if the latter, then the poundage would actually fall in real terms as the total pool of properties increased.)
The effect of this is that, assuming that there is continuing real growth in the economy, UBR will absorb a steadily declining proportion of it. (The parallel is the current linking of the state retirement pension to inflation rather than earnings.)
Consequently, rates would once again take a smaller proportion of occupancy costs. The bargaining position of landlords and developers would improve correspondingly. Indeed, for as long as the new system remained, they would secure a permanent benefit, and the ability to obtain an extra slice of “true rent” as described by economic theory.
This assumes that a second revaluation in 1994 would have only a minor impact on relative values, although it is to be expected that shops may move differently from other types of commercial property, and that there could be variations in increases in shop valuations from one area of the country to another.
On this analysis, the prospects for a renewed wave of investment in new shopping facilities (assuming always that the economy as a whole remains reasonably prosperous) are encouraging beyond 1995. Indeed, to the extent that the introduction of UBR must be expected to contribute to a marked slowdown in the next three or four years, that very fact will assist in the subsequent rebound.
