John Webber asks if increasing the share of the country’s business rates bill to be paid by the logistics sector will be enough to make a difference to the high street.
Given the carnage on the high street following the 2017 business rates revaluation – and the resulting raft of high-profile CVAs, administrations and store closures – in some quarters there have been high hopes that once the next revaluation (2021) comes into play, salvation will be at hand.
Retailers, particularly those in central London which have been suffering from massive rises in their rates bills – over 100% in some cases – or those in regional centres which are still paying too much because of the policy of phasing in decreases, have been vociferous in recent weeks that the system must change.
Rates bills have fed into other rising costs retailers are facing at a time of a drop in consumer confidence and, for many, a switch to online shopping. Last year retailers saw 20,000 high street outlets closed and 150,000 jobs lost. 2019 has not been much better.
However, looking ahead, some commentators have forecast that the next revaluation may well go some way towards redressing the balance between the rates bills of the retail sector and the industrial/distribution warehouse sector. This is because business rates are tied to rents, and there is no doubt that rental values for much retail space have declined in the past couple of years, whereas in some areas industrial rents have risen sharply.
The logistics boom
According to research by Colliers, which analysed the top 30 logistics locations for rental inflation, rents for industrial space/distribution warehouses soared in the period between 1 April 2015 (the date at which rental levels for the 2017 revaluation were set) and 1 April 2019 (the date on which rental levels have been used to calculate rateable value (RV) for the next revaluation).
In particular, industrial rents in those locations close to densely populated towns or cities, or where land is in keen demand, have seen significant growth. Rents in Bolton and in the London Borough of Haringey increased by 62% and 61% respectively between 2015 and 2019 – the highest rental increases across the UK, according to MSCI data.
And rents for industrial premises in Reigate, Redbridge, Southwark, Greenwich, Newham and Tower Hamlets increased by between 40% and 55% across the same period. The lowest‑ranking location in the top 30 was Thurrock, and this still saw rents rising by about 25% between 2015 and 2019.
Meanwhile, rents in many high streets are currently falling, particularly in areas where shops are shutting and landlords are unable to re-let space. Colliers’ Midsummer Retail Report revealed that average prime rents across the UK fell by 7.01% between 2018 and 2019, including declines of more than 5% in London and nearly 13% in Wales, with every region showing notable falls. And that is just prime locations.
Most recent figures for the past 12 months show the largest reduction in average rents since the 2008-2009 period, when UK-wide rents fell 11%.
Levelling the playing field
This rebalancing of rental levels will mean that those occupiers of industrial property and those in large logistics and distribution warehouses will see big rises in their rates bills in 2021. And these rises will also capture the big online retail providers such as Amazon, which use distribution warehouses to hold their stock. Such retailers have been criticised in the past for paying much lower rating bills than their competitors on the high street, creating an unfair playing field.
According to the Office for National Statistics, the retail sector pays nearly 25% of all business rates, even though the gross value-added from retail is less than 10%. And, of the total rates bill paid by the retail sector in 2018/19, 94% was funded by the high street, and only 6% by online retailers. That contrasts starkly with the growing proportion of UK net spend claimed by online retail, which reached a high of 21.5% in November 2018. So, the time is ripe for change.
Online retailers with large distribution sheds are predicted to face increases in RVs greater than 30% in many locations. Added to an expected increase in the uniform business rate, that will mean actual rates liability increases in 2021 could be as high as 50%. So, is this the answer? Will this rebalancing of who pays the rates bill make a difference to the fate of the high street retailers?
Colliers is not so sure.
More tough times ahead?
In reality, 2021 is still a long way off. Many high street retailers will still be paying higher business rates bills than they should be for another couple of years, with inflation rises added on top. For some, the wait will be too long. Already, more than 4,800 store closures have been announced by retailers in 2019, and these include big names: Boots, Debenhams, Marks & Spencer, etc. Others are on their way – the long list of CVAs and administrations still has some way to run.
Then, the multiplier – the figure against which the RV of a property is multiplied to create the final rates bill, which rises every year with inflation – looks likely to soar even higher following the next revaluation. This is because it is unlikely that the increases in values from the industrial/distribution space will be enough to counter the fall in value from the retail sector.
Because the business rates system must be revenue neutral and raise the same amount of tax every year, the only way to do this would be to raise the multiplier for all payers. We believe the multiplier might reach 55p at day one, which means it could reach 60p in the pound by the end of the 2021 rating list, keeping rates bills high for those still paying.
Another factor to consider is that to split the sector between online and high street retailers is over simplistic. Many high street retailers also have an online presence, and for many this is growing.
Stores such as John Lewis or Next need distribution warehouses as well as having a high street presence. Next, for example, has announced it is developing a large number of big warehouse projects to support its growing online and homeware arms – so reductions in business rates in its high street stores are likely to be countered by rises in bills for its distribution network.
And Colliers research has found that, in some cases, the steep rise in the RV for industrial units, particularly those near towns, could well affect many other prime high street retailers, independents and wholesalers which rely on a supply chain to replenish stock and deliver to customers. Any increase in costs for storage/supply chain services will eventually be passed on to retailers and their customers.
The high street needs help
The type of tenants you would find in these urban, last-mile logistics locations, which will be the most affected by this rates revaluation, are parcel delivery, trade counter operators and occupiers of urban light industrial properties in general. Operators such as Hermes, DPD, Royal Mail and Yodel will be the hardest hit – and for economic and strategic reasons, many high street retailers, independents and wholesalers use these kinds of parcel delivery services within their supply chain. As a result, the revaluation of RVs for industrial premises will filter through to the real economy, affecting the cost of in-store and online fulfilment operations.
So, waiting for the market to “balance itself out” is too lengthy a process – or too simplistic a view. With the cataclysmic reduction in RVs for whole swathes of retail, it is unlikely that any increase in those for online retail warehouse sheds will be able to plug the gap.
For many, seeing Amazon and similar retailers’ liabilities increasing substantially will produce a wry smile. But whether this really makes much difference to the long-term retail picture in the UK is extremely doubtful without the radical reform of the business rates system we have been calling for.
Main image © Keystone-SDA-Shutterstock
John Webber is head of business rates at Colliers International
