Are rents and rates too high?

 

                   Outside central London the commercial property market is not in a happy state. Many of the High Streets I visit have too many empty shops, and too many others let out to temporary tenants on lower rents just to fill them somehow. There are numerous office properties available, with some landlords keen to put a tenant in  to pay the rates and make some kind of contribution. The Southern Cross Care Homes problem partly revolves around property values and rents. The company itself wants lower rents from its landlords to be able to live within the fees and charges it can levy on the public and private sectors for its patients. In Wokingham, typical of many market towns, the smaller traders are asking for rent or rate relief as times are tough.

The problem goes back to the credit excesses of the 2005-7 period in many cases. Commercial property values became overextended, as banks responded to the low interest rates and the lack of regulatory bite on bank balance sheets, lending ever larger  sums against ever more extended valuations. They justified it by insisting on high rents, and looked forward to upwards only rent reviews yielding more profit later. If rents fall too far, or if there are too many voids, these property values which still underpin a lot of bank lending will be forced down. As the taxpayer owns a chunk of Lloyds and most of RBS that means more losses for taxpayers.

The government says it wants business outside London to flourish. To do so we need an affordable pattern of rents and rates for business premises. Rates are a big part of the problem, now accoutning for a substantial proportion of total property costs in many cases. For landlords empty property rates are a killer. In many cases the last thing the landlord wants is an empty property, so the incentive of high rates is scarcely necessary to seeking a tenant.

High rates do act as a further incentive to cut the rent more to avoid having to pay the rates. In some ways that is a good thing, but it means even more downward pressure on the property value, which hinges crucially on the rent but not the rates. This in turn makes banks more nervous about new lending, and means larger losses for taxpayers through the banks we were made to own.

I have suggested in Wokingham where the Council and a developer are planning a redevelopment of the shopping centre that they go over to a mixture of fixed and turnover related rents. The base rent could be set at a low level to attract more tenants, and to give start up and small businesses more of a chance of getting going. The landlord could rely on the turnover related part of the rent for more of his return. This would ensure successful large multiples paid a fair rent for the pitch based on their success. As the smaller and newer shops picked up speed they too would start to contribute a sensible rent. The landlord might wish to keep the right to terminate rental agreements where after an agreed period it was clear the retailer was not going to be paying any turnover related rent. Such a split system would also give some flexibility in valuing these assets, as valuers would have to make a prudent forecast of the turnover related element.

It would be good if the state could make its contribution to the revival of High Street businesses and office park enterprises by reducing rates. It looks as if, as so often, it is the private sector which has to take the whole hit. Lower rents will speed recovery. It is taking time to achieve them, and it will have a further impact on banks and bank credit. The sooner the adjustment is made the better. It’s a pity we end up with the state taking an even bigger proportion of the tenants payments for proeprty.

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23 Comments

  1. Posted June 14, 2011 at 6:28 am | Permalink

    I may be Labour, but that is a nice idea. We could do with something like that in Croydon.

  2. Posted June 14, 2011 at 6:56 am | Permalink

    My wife and I are shoppers, not shop owners. So why do we ever go into Wisbech? Well, there is the Library. There is also a really good market on Saturdays. Sometimes we go and exchange books at the many Charity Shops.
    There is much more point in stocking up on food out of town at Tescos etc. The hospital has more or less moved to Lynn, 17 miles away. For serious shopping, we go to Peterborough or Lynn. Our all important car is looked after at March. All the schools are out of town too. As is the “College”. Actually, I do some teaching at the Church. That, too, is out of town.
    So the town centre is actually falling down. Honestly, it really is. Large parts of it are now deserted and unsafe. Shops are sometimes burned out shells and others are gaps like missing teeth.
    At bottom, we have to face the fact that the days of a railway delivering people into the town centre have long gone. Now we go by car to out of town shopping, as they do in many American towns. I bet your local Tescos (or whatever) isn’t grumbling about the rents or parking charges!

    • Posted June 14, 2011 at 7:37 am | Permalink

      Taxes on empty shop (which are costing money not producing it) are absurd they are just wealth theft. The reasons they are empty is largely too much tax all round, incompetent economic management by government, too high rates, too big a state, restrictive planning and bad employment laws.

    • Posted June 14, 2011 at 9:47 am | Permalink

      It is policy to either exclude or at best strongly discourage private car access to the town and city centres. Result = ?

  3. Posted June 14, 2011 at 8:12 am | Permalink

    UK’s shopping habits are changing, from high streets to out of town malls or supermarkets.
    The recession is driving the move.
    Landlords – high street – are still expecting 5% plus yields – where they were before the recession.

    So some units are empty for long periods.

    The longer landlords hold onto these expectations the greater the shift to out of town.

  4. Posted June 14, 2011 at 8:50 am | Permalink

    Business rates for retailers should be replaced with a simple sales tax. This cannot happen while we are in the EU. One day, hopefully, we will be released from the chains of this organisation and run the country on a common sense, business like and commercially sane basis.

  5. Posted June 14, 2011 at 9:02 am | Permalink

    To answer your question , yes , rates and rent are too high. Levels of rent on High Streets are unrealistic for small start=up businesses and the local Gauleiters make similar exorbitant rates demands. Talk about killing the goose that lays the golden eggs! It is also the reason that our town centres are replicas of each other , national chains exclude competition and deaden choice for shoppers.

  6. Posted June 14, 2011 at 9:44 am | Permalink

    John, I am afraid that Wokingham just like many other Councils, just does not get it I am informed that a recent Council lease for very small shop, which came up for renewal in the Town hall market place area, was not renewed by the shopkeeper, because the council wanted a 30% increase, hence the electrical spares/repair man left, to be replaced by an extension to the coffee shop next door.

    The Council probbly thinks it done well getting an increase, but the Town has lost some divesity of business. We now have a town full of coffee shops, some of which are used as cheap business meeting places (I have even seen/heard job interviews taking place in public) and I suppose who can blame them, instead of paying for more expensive private hotel rooms.

    The biggest failing of all Councils, and the rapid demise of Town centres, is the attack and war on the motorist, with little parking provided and huge costs and penalties.

    I had to go into Richmond last week on personal business, the office/shop was in the Town centre (on the one way system), car parking around Richmond Green, behind the town centre, was 2 hours maximum for £6.00, there were plenty of empty spaces. Old Deer Park further out of town was certainly less expensive at £3.00 for 2.5 hours, but the charge depended on the emissions rating of your vehicle (no matter that it had no emissions because it was parked) for which you had to contact the Council before you parked to register, otherwise the maximum charge rate was made.

    Given my meeting overran the expected duration I had a choice, continue with it and get fined, or break it off having already completed the core of the business and get back to the car with a minute to spare.
    Had parking ben more reasonable, after the meeting I would have normally wandered around the Town and river, had a cup of coffee, looked in the shops and may have even purchased something instead of going straight home.

    Who lost out, the local shopkeepers.

    • Posted June 14, 2011 at 9:14 pm | Permalink

      Bif profit margins on a cup of coffee, hence they can afford to pay more rent and boost property values for the wealthy families and institutional investors than own our town centres.

  7. Posted June 14, 2011 at 9:49 am | Permalink

    I still think that the real problem here is that we have an asset bubble which has continued to be inflated by QE, and because the ‘taxpayer’ has shouldered the burdens of bank losses there has been no readjustment.

    There has not been the wholesale readjustment of prices in the property market that should have happened when the economy hit the buffers. Until that happens, then the lenders will not have taken their share of losses based on wild loan/value ratios and rediculous overvaluing and the market will not find a realistic value. This is the main thing stifling growth.

    We have avoided the real pain of a property crash at the expence of perpetual underperformance.

  8. Posted June 14, 2011 at 9:52 am | Permalink

    What is this “high street” you talk of?

    Oh, are “high streets” those places that never have any convenient free parking, particularly ones that have been “pedestrianised”.

    Horrible places, I can drive to tesco, park for free, and I don’t have to walk a fair distance from the car park to the shops.

    (And no, the answer is not to tax tesco parking, the answer is to stop this stupid pedestrianisation of town centers, and to make parking practicle and convenient, otherwise you may as well just burn down town centers rather than let them slowly rot).

  9. Posted June 14, 2011 at 10:59 am | Permalink

    {Performance related rent – nice way of introducing the performance concept into the psyche}

    Aside:

    “The problem goes back to the credit excesses of the 2005-7 period in many cases. ”

    ——————————————————————————————————-

    And this misallocation of resources continues to be encouraged in the residential sector as well. Mortgage lending is now increasing, which is unsurprising given the 2 to 3% rates available, savers are having their money ‘stolen’ and yet the Governement allows this reinforcement of the stauts quo rather than the claimed rebalancing to continue. Any other good ideas in other sectors, whether acted upon or not, are liable to be seen as disingenuous. This Govt has a chance to rebalance the economy and culture between saving and debt but appears to take delight in high inflation and emergency interest rates.

  10. Posted June 14, 2011 at 11:43 am | Permalink

    Increased property prices= increased rents or lower yields (measured at current property price) for the ‘new landlord’. What is supporting the property prices if the units are empty.

    Would that be interest rates set by the BOE?

    How about raise interest rates to neutral levels slowly, property values will probably fall. Then create money(non interest bearing) to purchase properties and lease them via an auction or in various flexible ways as outlined. The government should retain freehold and control, similar to how major newbuild sites work.

    More economic activity, direct transmission of assets into use, under macro goverment control. e.g. 1 post office etc The money created if managed correctly will recycle to banks and mitigate the deflation of the money supply caused by earlier ponzi boom.

  11. Posted June 14, 2011 at 11:47 am | Permalink

    You set out the problems precisely.

    However, turnover rents are fiendishly complicated (and expensive) to administer, and turnover is not profit. If no profit is being made, the rent still cannot be paid, no matter how it is assessed.

    The only real answer is for the rental values, and hence the capital values, to fall. The Banks will have to take the hit on the security, but if they are sensible and re-negotiate the loan terms (e.g. length of loan), they will still have a performing security.

    The difficulty is that Banks are very rarely sensible about these matters-none of the management want this sort of “loss” to happen on their watch-rather like governments in fact.

    • Posted June 15, 2011 at 10:27 am | Permalink

      Agree with these comments.

      In a market where over supply is an issue then rents should be falling

      If the landlords prefer to keep their attempts at high values and still pay the empty property commercial rates that is their commercial decisions. I would have thought just getting a tenant who pays the rates is a “win” of sorts for the landlords to bear down on costs

      I fear that the whole circle, however, just like with the current issues with Southern Cross goes back to the banks who are demanding and not taking the “haircut” that is required to re-establish successful business.

  12. Posted June 14, 2011 at 12:03 pm | Permalink

    As I understand it, business rates are centralised in a government pool before being redistributed back to local authorities. Thus the commercial distortion is twofold – first, rates undermine the relationship between the true open market value of premises and the cost to the tenant. Second, the connection between a local tax and the local authority is broken. Business rates represent about 5% of total government tax income (according to Wikipedia), so it is unlikely that the coalition will want to kill this particular golden goose. However, if the business rate was to be abolished, rents would more fairly reflect the value of the properties, enterprises would stand a better chance of flourishing and the overall health of the economy would benefit. The “loss” of 5% would almost certainly be more than offset by this beneficial effect, but of course the offset would be impossible to quantify, so it would receive no political support.

  13. Posted June 14, 2011 at 12:48 pm | Permalink

    I believe that care homes as with hospitals and schools being paid for as they are very substantially out of public funds are not legitimate arenas for entrepreneurial activity. The disgraceful goiings on at Southern Cross and the equally sordid revelations concerning PFI projects undertaken by the previous administration suggest strongly that these institutions attract the attentions of the very worst representives of the rentier class. Ideally, the model for such institutions should be Charities in ownership of their own freeholds like our best schools; hostpitals, schools, care homes should not be caught up in the vagaries of the economic cylce and greeds and incompetencies of those at the financial cutting edge; they are not optional extras for the good times, only.

    With regard to shops and rates and rents; yes, if an area is not run down but yet fails to tenant its commercial premisies, then the fix overheads must be too high. With so much shopping conducted at superstores and on-line, our town centres are obliged to offer goods and services on what remains. There may be problems though with turnover model as a component of rent as a general model rather than one specifically tailored to one developement where the landlord is the council (I think?): The use of turnover would in effect give the landlord the right to participate in a successful business model for which he has had no invoivement, whilst using the profits to subsidise less successful businesses, which smacks a bit of socialism! The turnover of a business is not necessarily representative of its gross profit since the markup on sales can vary from less than ten per cent for groceries to four hundred percent and more for fashion and luxury goods. Furthermore in the case of a showroom taking orders to be executed off the premises, the turnover may be based on activiites in a factory on an industrial estate which is itself subject to rates (and rent). The more frequently that turnover is assessed, the more expensive will be the additional operating costs for both the shop and for the collector.

  14. Posted June 14, 2011 at 2:26 pm | Permalink

    I can’t help but think this is because of taxation. When companies, especially new ones set up in commercial premises they get a massive bill for tax before they’ve sold anything. That needs to go alongside council tax.

    The high street is dying because of parking charges – a tax in any other name – and the daft idea of increasing VAT during a flat sales period when we urgently need people to buy things to drive employment in other areas.

    Mr Redwood, I appreciate entirely that you are a true Conservative but if the current scale of tax and waste continues eventually there will be so few tax payers left that there’s nothing left to tax.

    I’ve moved my own company overseas because of punitive taxation form the UK. When we moved we didn’t get a bill or parking charges, green taxes or landfill charges, waste disposal taxes – we got a letter inviting us to free language courses (German, Italian and French), an invte to an evening do for new businesses and assistance on finding homes and schools for the children of families who moved with us.

    That’s five families, 10 next generation tax payers that the UK will probably never see. It doesn’t make sense that the Tories are continuing Labour’s work.

    • Posted June 14, 2011 at 9:01 pm | Permalink

      Indeed just leave the UK – until enough do Cameron will continue on his merry mad policies you will be surprised how much better run many places are.

  15. Posted June 14, 2011 at 8:35 pm | Permalink

    What do the banks and the council think shop owners’/landlords are going to do? Volunteer to pay unreal rates and rents? They obviously do as the shops are empty. A perfect example of the market not working. The councillors live in another world, just waiting for fools whilst the high streets shops lie empty and get get no rates rather than some, with the council taxpayer having to live in these ghost towns of charity shops and takeaways for drunks. Never seem to see these takeaways going bust whatever the pubs bleat. 5 o’clock licence for the takeaway? Another takeaway next to the other five? No problem the residents can ram it. I do not live near a pub or a takeaway by the way that I have problems with.
    The Green, EU, tax fantasy is not going to convince anyone on this. It is greedy councils and banks plundering the high street helped by idiot councillors. The supermarkets are another story and many local councils have got it in for them to. To posh for the down market ones that many people want and restricting the more expensive ones when they want expand.
    The blame lies mainly with the councils and their lack of vision. The redevelopment of many town centres is a farce and expecting retailers to pay rents and rates on these is a joke. Boozers and takeaways are all they are good for. Well that opticians, estate agents and card shops too. Hardly likely to go for a drink on Saturday night unless you are eighteen and preloaded before you go out. What the market wants? Don’t look like it has much choice.

  16. Posted June 14, 2011 at 9:25 pm | Permalink

    Since a lot of town centres are owned by wealthy families that have had freehold over this prime land for generations, why should the taxpayer subsidise their land values any more?

    Between them, the innovation and progress created by the private sector and infrstructure put in place by the public sector have already inflated the location value of their prime land.

    What’s not held by wealthy families or the like of the Church tends to be held in REITS and suchlike, owned mainly institutional investors. If the REITS have leveraged themselves too much, and the banks have made silly loans to the REITS we have to look at the debt for equity swap solution.

    Support a VAT rise (gross profits tax) then demand tax breaks for wealthy land owners. It sounds like neo-feudalism to me.

  17. Posted June 15, 2011 at 10:27 am | Permalink

    I have a small business. I own the freehold so no have no rent to pay but the non-domestic rates are a killer, £15,000, which is a hell of a lot to find on a turnover of less than £200,000. The local Asda pays less than £250,000 per annum on a weekly turnover in excess of £5,000,000. That means I’m paying about six hundred times as much per square foot as them. I don’t think that this is very equitable especially as money spent with me stays in town. Money spent at Asda goes to head office.

    We need a fundamental rethink on the way local government is funded and we should look at VAT as the means of doing this given that VAT revenue and the cost of local government is broadly similar. Non-domestic rates and council tax would be abolished.

    All VAT should be at the same rate and nothing should be exempt or zero rated except for staff costs, bank interest and loan repayments. Also get rid of the VAT threshold so all businesses will be on a level playing field. The likes of Tesco and Asda will be making a much more much more significant and fairer contribution to the local economy. We will also see a complete change of attitude from local authorities. Councils will have an interest in economic activity as they will get a cut. It would be a joy to see my council adopt a business friendly attitude rather than the policy of open hostility we endure at the moment.

    The VAT return would be a doddle to calculate: Sales minus purchases divided by 6 (assuming a VAT rate of 20%, for a 10% VAT rate it would be sales minus purchases divided by 11). The easier and faster calculation would enable businesses to pay more frequently (ideally monthly) which would iron out the peaks and troughs in our cashflow and the government’s.

    This is roughly how GST works in Australia and their high streets are thriving.

    It won’t happen. It’s against EU rules. We’d have to come out of the EU to do it.

  18. Posted December 17, 2011 at 9:28 am | Permalink

    If some of these idiots bought these premises at the top of the market in 2005 -07 then they are the losers in the capitalist race, why should they automatically be expected to make a profit, the “market” should be the factor that should be allowed to re-set the rents not an interfering government.

    We moved our double fronted high street business on to the internet and up north to an industrial unit for distribution / shipping, and we got more than 5 times the space for a fifth of the cost, consequently we now turn over a lot more money and make a lot more profit.

    If anyone is reading this and you own a High St. business you need to ask yourself, are you working just to keep the landlord in business?

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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