The Business Rating Revaluation Conundrum
From a commercial property viewpoint an easing of credit and availability of finance for property lending will provide some real impetus to growth. My colleague Neil Slade talked about a shortage of new development where demand exists but credit is difficult and I thought it was worth supporting Neil’s piece with a little more detail.
Well the headline from the latest Ernst & Young Item Club that “The crippling credit crunch is loosening” certainly seems to be a pointer that the availability of credit may be getting a little easier.
There is little doubt that the ongoing credit crunch and crisis in the Banks continues to affect business thinking nearly 5 years on from the start of the world’s economic woes. The effects on property both commercial and residential are well catalogued and there for all to see – not least the retreat of values!
It is not an argument for inflating property values – what we need is more financial liquidity in the market to ‘make things happen’.
The Item Club lays bare some of the statistics around the credit crunch. Part of their commentary was how UK Banks borrowed “£900 billion” that was borrowed from overseas up to 2008 and how we’ve been paying the price ever since as the UK reigns back from the £100 billion a year that Banks were using to fund domestic lending.
The Item Club explain that once it happened, the breakdown in the funding markets triggered several other crucial factors. Secondary banking subsidiaries had to be supported, straining capital adequacy ratios. Loan losses had the same effect. Bank boards, as well as their shareholders and regulators, became very risk-averse as the losses mounted. Tougher capital and liquidity requirements exacerbated the lending squeeze. The ensuing recession made Banks even more worried and of specific concern for those earning their money in the property market, about the solvency of mortgage borrowers and small businesses. Lending was depressed because the economy was depressed and vice versa, a classic vicious circle.
The Item Club thinks the background of tight credit and the Banks’ liquidity issues may be coming to an end with credit and liquidity requirements having been relaxed. The Bank of England’s new Funding for Lending Scheme is designed to increase the flow of credit and reduce its cost, increasing the funding gap, or at least slowing the speed at which it is paid down. It will reinforce the effect of the revival of the UK mortgage-backed securities market seen in recent weeks.
Ernst & Young say that ‘Although banks remain very risk-averse, they are effectively shifting the risk lending to affluent home buyers who have equity to invest. In the case of first-time buyers, the builders and the government are shouldering the risk through new-buy schemes. The banks’ capital base is also recovering’ they say. Furthermore they comment that ‘These developments help to explain the marked improvement in the mortgage market suddenly being signalled by the Bank of England’s Credit Conditions survey, the sharpest since this survey began in 2007. In the third quarter of this year, a significant proportion of mortgage lenders said they had loosened their lending criteria or were planning to do so, while 22% were planning to reduce the mark-up on mortgage rates. The survey suggested that little movement in unsecured lending and forecast a continued deterioration in the outlook for lending to small companies, which it seems, are still regarded as too risky. Nevertheless, these developments are encouraging.’
A lot of economic detail but for ‘property watchers’ and for those like us working in the property industry these are important pointers for how the market may perform over the next 12 to 24 months.
>Not sure we can say this is the end of the credit crunch although we’d all hope that, it may just be the ‘end of the beginning’ though
I read at the weekend that the Government is intending to stand firm by its postponement of the 2015 rating revaluation, despite fury from property and retail bosses.
What does this mean for the High Street? In an age where retail activity is increasingly shifting to the internet and those retailers who don’t have an online presence are labelled as “toast” by an industry expert, there seems to be little doubt that a realignment of the cost of High Street occupancy is needed and the split of the property overhead between business rates and rent seems to be shifting.
Whilst retailers may have been looking for significant reductions in rateable value in the forthcoming rating revaluation, given the wider economic picture, there is little doubt that the Government would probably have sought to maintain the total tax take in some other way. In other words, if rateable values had reduced, it would not have been a total surprise to see the uniform business rate (the multiplier used to calculate the rates payable) shift significantly upwards!
Nevertheless, have we reached a tipping point on the High Street?
According to the Sunday Times, Peter Simon the founder of Monsoon has threatened to shut some 400 of his stores because he said exorbitant rates and rents are threatening the High street. Monsoon has already started closing some stores and is warning, along with other retailers, that High Streets across Britain face being “wiped out”.
The Sunday Times also reports that in Stockport, up to half of the shops in some streets in the Town Centre are boarded up. The paper further reports that “John Timpson, Chairman of Timpson, the Shoe Repairer and Locksmith, said “there is a shop in Stockport that we would have taken if the rates had been lower. The rent was £10,000 a year, but the rates were £18,000. I always reckoned the rates would be about a ⅓ of the rent but now they are out of kilter.”
It therefore appears that Landlords are responding to an oversupply of vacant available retail premises and the tough deals which retailers are negotiating by reducing rents, however there is no provision to see a reduction in rates payable at the same time.
So where does this leave the High Street? With increasing competition from online retailers, one could see a situation whereby retailers take smaller High Street space to showcase products, whilst the bulk of business shifts to online. A collection point in each store for online purchasers could become a crucial part of every High Street offering from multiple retailers. Whilst this business model obviously works for national multi site retailers, it potentially does not assist the independent who may still rely on footfall and passing customers. Nevertheless, a multiple occupier presence on the High Street, even in the form of a smaller unit with a collection point will at least still attract customers to a High Street, as opposed to business disappearing off the High Street to online only, with delivery to the door.
How Local Authorities therefore work to encourage visitors still to a High Street, particularly having regard to parking policies and the interrelationship with public transport is probably another topic altogether for debate!
At Harris Lamb we have recently agreed a number of creative deals on the High Street on behalf of clients to help bring life back into empty retail units and locations. If you require any assistance in respect of retail premises please contact Matthew Pegg 0121 2136046 or email email@example.com