After years of ever-deepening crisis, the retail sector received a shot in the arm last month with the publication of the new rating list for England and Wales.
While some sectors – notably industrial and logistics – will see their average rates increase when the list, which sets rateable values for properties and consequently how much occupiers will be asked to cough up in business rates, goes live on 1 April next year, the picture in retail is quite different. As a whole, the sector will benefit from a 10% fall in rateable values, although the headline number disguises some significant variances.
According to Colliers, stores on London’s Oxford Street will benefit from a fall in rateable value of around 30%, with Selfridges’ rateable value decreasing by a whopping 45%. It is a similar picture elsewhere. In Newcastle, for instance, the rateable values for stores on Northumberland Street, the city’s traditional retail centre, are going down by 36%.
This is, of course, the early Christmas present the retail sector has been waiting for. However, it is also possible that some landlords may scent an opportunity. After all, if retailers’ total occupational costs are going down, surely they can afford to pay a bit more in rent. So, is there any evidence of such behaviour?
It is, of course, very early days, but BE News was able to establish that some landlords are at least thinking about hiking rents in the wake of the publication of the new rating list. Speaking off the record, one property source says: “I have spoken to a couple of landlords who have said: ‘Well, if the rateable values have collapsed, surely I can get more rent?’”
For the moment, however, the property sourece’s answer to that question is a firm ‘no’, at least in retail centres with high vacancy rates, which at the moment is most of them. “At the moment, there are just too many shops available,” the source says. “They’re still fighting with 40 other shops in their section of a street. I’ve got a couple of lease deals that I’m negotiating at the moment with tenants where they have said they would only renew on the basis of the rent rebasing in any event. There isn’t going to be a flood of rental values going up; not a chance.”
John Webber, head of rating at Colliers, tells a similar story. He says that he hasn’t actually heard of any landlords trying to push up rents, but he has no doubt that some will try. “There are always some people willing to take advantage of a situation,” he says, although he adds that most landlords will welcome the publication of the list for quite different reasons.
Quite simply, Webber says, landlords are pleased that their occupiers’ rates bills are going to fall because it means that they will become more sustainable businesses and are less likely to default on their rent, leaving yet more gaps in a portfolio. The fact that the government is changing the rules to allow retailers to benefit from the fall in rateable values immediately is welcome news for much the same reason, he adds.
Indeed, Webber says that many landlords had been awaiting the publication of the list before approaching occupiers regarding service charges, which will inevitably have to go up as a result of inflation, which is currently running at around 10%. “They’ve been waiting to deliver the news on what’s happening with service charges,” he says.
“The rates reductions are helping to offset that really bad news, which is a massive increase in service charges because of the energy costs. If any landlord then says: ‘As well as your giant service charge bill, by the way I’m putting your rent up…’. I cannot see how they could get away with it.”
Jerry Schurder, business rates policy lead at Gerald Eve, agrees. “Letting a property is always around market supply and demand and the negotiations between landlords and tenants,” he says. “In recent years, because of very high business rates and other liabilities and because of the absence of market demand, landlords have been in an extremely difficult place and have almost had to give away their property.”
He adds: “I don’t see, in the vast majority of locations in the country, that retail is in such demand and that retail space is in such low supply that the balance of negotiation between the parties has shifted significantly as a result of the revaluation. Retailers generally are still facing extremely tough times.”
All of this raises the question: under what market circumstances can landlords have a legitimate expectation that increasing rents is feasible? The answer to that will be different in different parts of the country, but to give just one example, Andrew Bond, co-managing director at Nash Bond, says that vacancy rates on Oxford Street are currently running at around 30% to 35%.
“In my view, until the availability rate falls below 10% to 15%, there won’t be a positive impact. [The fall in business rates] will assist in the excess stock being taken up quicker, but there are still a lot of landlords who are going to find it very, very difficult to let their shops at the moment. It could easily take years.”
Some landlords will hope Bond is being unduly pessimistic, but if it does take years, meaning rents are not hiked, occupiers certainly won’t be complaining.
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