How will the 2015 Budget affect London Commercial Property?

Just weeks away from a General Election, the Chancellor’s 2015 Budget was always likely to steer clear of dramatic announcements in favour of steady, unsurprising continuations of existing policies. The tone of the Budget was designed to support the Chancellor’s assertion that he is following a “long term economic plan.”

Of the various measures relevant to London commercial property, here are the four with the greatest potential impact:

1. A ‘radical’ review of business rates

Since the business rate system has been largely unchanged since Chancellor Nigel Lawson’s reforms in 1988, many would argue that this review is overdue. Based on the ‘Poor Law’ dating back to 1601, rates are based on property valuations from 2008, calculated before the economic downturn depressed commercial property values. And rates paid by English businesses are already the highest in the EU.

A revaluation scheduled for 2014 was postponed, and businesses could be in for some surprises when it finally takes place. Industry leaders have called for more frequent reviews, to provide their members with more certainty and the ability to forecast their outgoings. 

The review has been prompted by two issues: first, the growing disparity in rates bills between businesses which occupy large premises and those (including online retailers) who may have small premises but high revenues. And secondly, the blight of empty commercial properties in some parts of the UK, which is blamed in part on high business rates.

The Chancellor has promised that this review will be ‘fiscally neutral’ – meaning that the revenue collected from businesses would be unchanged - which begs the question of who will be required to pay higher rates to compensate for those enjoying a reduction. As one commercial property expert observed: “He may find that such volunteers are rather thin on the ground.”

The expectation is that online retailers may need to pay more, but it is not yet clear how a property tax could be linked to the activities of a business in this way.

 

The view from London

London businesses would argue that they already pay high rates and could benefit from reductions, even though vacancy rates in the capital are lower than in some other parts of the UK. Leaders of industry groups such as the CBI will need to take into account London businesses’ views as the review gets under way.

Certainly the high value of London commercial property could cause problems for businesses if rates rise sharply, so the issue needs to be kept under close scrutiny.

 

2. City regions to retain 100% of additional business rates revenue

Starting with Manchester, Peterborough and Cambridge, the Chancellor announced that regions will retain the whole of additional business rate growth ‘beyond expected forecasts’ as a means of rewarding growth in local business activity.

This measure received an enthusiastic response from the British Property Federation, whose chief executive Melanie Leech called it a “vital tool for local authorities. These pilots will give them the freedom… to encourage development to take place. At present, the vast majority of local authorities simply do not have the long term certainty that is required to use business rates in this way.”

The view from London

The move has been seen as a step towards building a ‘Northern Powerhouse’ but it could equally benefit London and the south if the pilot scheme is successful. Some commercial property experts talk of trying to ‘replicate London’s success,’ which is reassuring to hear.

However, Local Authority priorities do not always coincide with those of commercial property owners, occupiers or investors, so this is another area to watch for the future.

 

3. Government buildings to be sold off

A new agency under the direction of the Treasury and the Cabinet Office’s Government Property Unit is to launch in March 2017, to “provide greater incentives for departments to rationalise the space they occupy.” In practice, this measure will mean government departments being charged a commercial rent for their premises, potentially pushing them to relocate to more affordable locations.

Around £1.4 billion has already been raised from the sale of central government property, along with savings of £625 million on annual running costs. The revenue from sales could reach an estimated £6 billion by 2020.

The view from London

This move further opens opportunities for commercial property developers and investors to acquire prime London real estate that has thus far been in government hands. It may also provide opportunities for commercial property professionals operating in areas such as Croydon, where some government departments have already relocated.

Having a “commercially-driven approach to land and property asset management” across the government estate is generally a welcome development.

 

4. New funding for regeneration schemes

While several cities in the North of England, Scotland and Wales received regeneration funding in the Budget, there were some modest announcements for London. These included £97 million for the Brent Cross regeneration scheme, along with the ring fencing of the local 50% share of business rate growth to support the local borough. A further £7 million funding was announced for Croydon Growth Zone to support an increase in housing and employment.

 

The view from London

Commercial property developers have been willing to part-fund some of the capital’s most ambitious regeneration schemes in recent years, as the rising value of real estate has rewarded their investment, while the 2012 Olympics and Crossrail have seen London enjoy the benefits of huge infrastructure development.

While few in London would begrudge the rest of the UK receiving an infusion of regeneration funding, policy makers should not lose sight of the remaining acute needs of some parts of the capital.

 

Conclusion

The major factors that sway London’s commercial real estate – interest and exchange rates – were of course untouched by the 2015 Budget. So on the whole, the measures were largely neutral in their impact on the sector.

The announced rates review will certainly begin a debate on which many in commercial property will have a view. But for now, it’s ‘keep calm and carry on’.