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Speculative development: Mind the gap

The inevitable fall-out from the last recession was a decline in speculative development projects and a shortfall in much-needed Grade A developments, both commercial and industrial, particularly in the Midlands and the North.

The government’s reluctance to provide tax relief for new projects has exacerbated an undersupply of good-quality functional buildings that could have assisted recovery.

As developers have lost confidence, the lack of support from government has been difficult to ignore.

One of the most retrograde steps was that taken by [then Labour prime minister] Gordon Brown in 2008 to charge 100 per cent business rates for empty business units. The policy has never been reversed and now blights the future of the regions.

Laughable attempt

Business rates have traditionally been a charge on the use and occupation of commercial buildings. Since April 2008 they have been a tax on the asset, empty or occupied.

The policy was, to many, a laughable attempt to ‘persuade’ landlords to offer ‘realistic’ rents to potential occupiers. The result has been to dissuade developers from breaking into new markets without the absolute certainty of early occupation.

“The gap between completion and occupation hold serious and expensive consequences for commercial developers”

In cities such as Leeds, Newcastle, Manchester and Birmingham, the sudden oversupply caused by the market crash of late 2008 became a gross shortage by 2012 as the economic climate recovered.

Market held back

The assumption by developers of new sites that rates will only become payable at the point of occupation could lead to unforeseen liabilities during the marketing period. Should a building be made fit and ready for use, local councils must charge full rates (where there is an assessment) after a short exemption period of between three and six months.

This perception has led to a profound slowing of new development, a tendency to hold onto landbanks and derelict sites, and new builds being kept from completing for fear of the dreaded full rates charge.

Local authorities are highly motivated by the knowledge that they will now retain 50 per cent of new rate liabilities for their own budgets, following a change in the law in 2013.

Councils are acutely aware that the statutory rating Completion Notice provisions allow for the possibility of a rating assessment and a charge, even where buildings are incomplete but are considered to be within three months of use.

A failure to challenge the billing authorities notice will lead to an assessment deeming a building to be complete and ready for use, even for ‘shell and core’.

The gap between completion and occupation holds serious and expensive consequences for commercial developers and the whole construction sector.

Richard Wackett is a partner at Montagu Evans

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