Completely overrated

With empty property rates continuing to stifle regeneration and investment in the property industry, the lack of new business space endangers our economic recovery argues Gareth Evans

More than 95 percent of UK businesses employ less than 250 people and as we move through a period of economic growth in the next few years many of these small and medium enterprises (SMEs) will find their expansion plans severely hampered by a shortage of flexible workspace caused by misguided government taxation policy. The provision of flexible managed workspace is an expanding sector and will continue to be so as small businesses and entrepreneurs increasingly reject conventional constrictive long-term leases which are unable meet their need for workspace that is adaptable to the needs of a fluid business.   

Small businesses need the easy-access, the lack of start-up costs and long-term financial commitments that managed workspaces provide. They also enjoy the flexibility to ‘right size’ their workspace in line with the demands of their marketplace. Bizspace is one the UK’s largest operator of flexible business space, business centres across England and Scotland providing more than 7m sq ft of office, studio, workshop and industrial space, as well as storage, self-
storage facilities and meeting rooms, on flexible terms to over 5,000 small businesses.

We have opened more than 50 business centres during the past three years, for which demand will continue to increase driven by the UK’s dynamic SME sector. This sector increasingly needs flexible space in order to prosper.

Yet space will not be available while new developments have stopped and owners are focussed on demolition rather than regeneration of vacant buildings. And the choice to demolish is purely because of the punitive taxation penalties introduced when the Government decided to withdraw rate relief on empty buildings.

Basic empty property rate relief on commercial buildings was removed on 1 April 2008, prior to which vacant retail and office space previously received 100 percent relief for three months and 50 percent thereafter, while vacant industrial space received 100 percent relief permanently. Since 1 April 2008, full empty property rates (EPR) became liable on all commercial buildings with three months grace for retail and office space and six months for industrial space.

The Chancellor’s November 2009 Pre-Budget report announced a slight reprieve, stating that for the financial year 2010/11, empty properties with a rateable value of less than £18,000 would continue to be exempt from business rates for a further year. This has helped in the short term, but is only a temporary measure and does not enable any sustainable planning for the long term to take place.

The Government’s intention by introducing the tax was to pressurise or incentivise property owners to let vacant buildings. This was a completely misguided judgement as landlords do not keep buildings empty by choice. They are empty because there is a lack of demand, which currently is primarily as a result of the recession. So now not only does an empty building produce no income, it is also taxed.

A recent report by the Royal Institution of Chartered Surveyors (RICS), in conjunction with commercial property consultants Lambert Smith Hampton, evaluated the period covering the first 12 months after implementation of EPR and found that building owners tended to wait just 12 months once a property has become vacant before making a decision to demolish. So, in the current financial climate the level of demolition is most likely to increase, with some economists predicting that Britain will not fully recover from recession until 2012, a large number of useful properties could have been lost by then.

In recent years, Bizspace has specialised in recycling older buildings, such as factories, warehouses, mills, office blocks and even disused supermarkets. Through sub-division and partitioning, such buildings could be turned into small workspace units that served the needs of SMEs. However, we are now finding that owners of vacant buildings are being driven to demolish such buildings as a direct result of EPR.

A strategy of demolition effectively means that the stock of buildings available to the flexible space sector as potential business centres is diminishing. This also contradicts common-sense environmental policy as the environment suffers directly from the demolition of buildings. This negative environmental impact is however, eclipsed by the pollution created by any new construction on site.

While our business model is one of continued expansion, all new and speculative business centres by definition, take some time to fill to an economically viable level. However, with EPR penalising us during the crucial time when a new centre is opened or refurbished, the economics mean that investment can’t be justified. This is further impacted by current rental levels which have fallen significantly as a result of EPR and the recession. This means that old buildings are not being refurbished and regenerated and new centres are simply not being developed.

By encouraging the early demolition of otherwise useful buildings and discouraging new speculative development and refurbishment, the imposition of EPR has acted to strangle the supply in flexible workspace for the SME sector, in turn making conditions harder for small businesses. The provision of flexible workspace will be stifled by the very Government directives that set out to help our nation of small businesses. This misguided taxation policy will again set us once again, firmly on a path to boom and bust, with rapidly rising rents. Surely this is the opposite of what the Government intended.

At the very least, the £18,000 rateable value threshold is retained permanently. Yet as the Government has picked up an estimated £800m in extra revenue since the new EPR ruling was introduced, it seems unlikely that the Chancellor will now want to abandon the scheme. This is despite the fact that since EPR was introduced it is estimated that £690m of EPR revenue has come from the public sector, a mystifying waste of time, effort and resources moving money from one public service office to another.

So, whilst the recession has not dented demand for flexible managed workspace, our industry’s ability to deliver flexible space in line with the demand that will be generated by the SME sector, will be severely hampered by misjudged Government policy.

Our current solution is to act as a bridge for both sides. By helping owners of vacant commercial buildings to fill their buildings with small businesses, alternative to demolition can be found. With more than 5,000 SME clients, Bizrate have had tremendous experience of managing flexible workspace.

By offering expertise to property owners that are interested in working with on a management contract basis can to help turn unoccupied or under-utilised space into income producing space. It may not work for everybody, but it may be a viable alternative for some. And until either EPR is reversed or the economy begins to grow, it is one of the only alternatives.