The government should cut business rates to encourage speculative commercial property development and help the sector grow.
As demand for commercial property picks up across the UK, it is vital the government helps remove barriers to speculative development by curbing business rates and freeing up developers to start building again.
There’s no doubt that business rates have come to represent a significant source of revenue for the state.
Government needs to help businesses
However, at a time when there are apparent efforts by the government to encourage business investment and buoy up the economy, it would make sense to do something to support the sector by considering a business rates exemption on all new developments.
“Developers are understandably reluctant to commit to projects where there is no realistic prospect of securing an end user, particularly within the logistics sector”
Unfortunately, a lack of speculative development continues to hold the market back. Illustrating this is the fact that just three logistics developments have been carried out speculatively in the Midlands during the past three years.
Developers are understandably reluctant to commit to projects where there is no realistic prospect of securing an end-user, particularly within the logistics sector.
In addition, developers are holding back from speculative investment in regeneration projects, such as brownfield developments, because uncertainty over demand makes the scheme unviable or too risky.
This goes against the government’s theory that if commercial buildings are empty for long enough, eventually landlords will accept any price.
On the contrary, developers need to know they have committed end-users who are ready and willing to pay the required rent for the duration of their tenancies before they will proceed.
Speculative development unlikely to return soon
The current mismatch in terms of the cost of business rates compared with rentable values means speculative development of any type is unlikely to get back on track any time soon.
“As demand starts to pick up, it is crucial that action is taken to support developers and to remove at least some of their risk”
In December last year, the chancellor announced plans to cap any rise in business rates at 2 per cent, but this move has been described as ‘tinkering’ at the edges of the problem.
The Institute of Fiscal Studies’ Green Budget report, published at the end of January, has since revealed that instead of the government doing something to limit the impact of business rates on the commercial property sector, their proportion of the overall tax take actually increased to 4.5 per cent last year (up from 3.9 per cent).
It is shocking to find that instead of doing something to incentivise the commercial property sector during the downturn, the government has actually been receiving more business rates payable on vacant properties and forcing some developers to the wall as a result.
As demand starts to pick up, it is crucial action is taken to support developers and to remove at least some of their risk – a two-year exemption from business rates for all new schemes would be a good place to start.
Kevin Nagle is a partner and property law specialist at Shakespeares