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.