Peter Muir, director and head of rating for Colliers International in Scotland
With this week’s warning by the Scottish Chambers of Commerce that the economy is “bumping along the bottom of a recession,” the rates sweetener announced by the Minister for Local Government and Planning, Derek Mackay MSP, for newly completed developments is welcome news.
From 1 April, such properties will receive a 100 per cent rates relief until the property is let, for up to 18 months.
The introduction of such a measure will undoubtedly give potential developers a degree of comfort, backed by the knowledge that there will be no rates liability for a set period of time after completion of a particular scheme, as well as potentially allowing projects currently at the planning stage to move forward to actual construction.
However, the news is tempered by the Scottish Government’s decision to follow Westminster on another key aspect of business rates.
Late last year, the government north of the border announced plans to postpone the scheduled 2015 Revaluation for two years, alongside a dramatic overhaul of the rules current governing empty property relief.
One area of concern is that this latest announcement applies to one specific class of ‘new’ property. In reality, it is limited to newly completed developments and is put forward in the hope that this will stimulate various factors, most importantly the construction industry.
However, the woes facing the Scottish economy, from the high street to the construction yard, will not be resolved by a narrow attempt to kickstart floundering demand.
Throughout Scotland numerous empty commercial properties are now subject to the recently announced changes to empty property relief, with a significant proportion of such properties in the retail and office class of premises.
Landlords of these properties face a significant increase in real terms of 40 per cent in their annual rates liability. This measure, which also comes into force in April, is intended to force landlords into reducing rents, so that they can find an occupier for any vacant property.
Not surprisingly, this hypothesis has been roundly rejected by analysts from across the entire property spectrum.
The approach is fundamentally flawed, especially in the current economic climate.
Outside the prime established centres of Glasgow, Edinburgh and Aberdeen, this is exactly what most landlords have been doing since the onset of the economic downturn.
The main economic factor that drives the property industry is that of supply and demand. In the current economic climate this has been turned on its head. Put simply, there is an abundance of supply but very little, if any, demand.
There are known cases of landlords offering property to rent at a nominal figure, simply to attract a tenant but with no success. Frequently, the annual rates bill exceeds the rent on individual units.
Vacant properties located in what previously regarded as prosperous locations have slipped to secondary ‘unattractive’ locations.
Such units now have the additional burden of being in a physical state that is outwith the requirements of a modern occupier, which has a further detrimental impact on their marketability.
Redevelopment works, backed by significant investment, are often required to boost the attractiveness of such properties. Assuming funding is available, such investment could put the brakes on any new development, as landlords in a desperate attempt to avoid a significant raise in annual rates liability, divert investment to improving existing outdated stock, to attract tenants.
To address this issue, the relief announced by the minister should be widened, to include properties that have had refurbishment and improvement works carried out with a view to making these more attractive to potential occupiers. This would allow such investment to take place and stimulate a resurgence of secondary locations.
An example is the traditional high street, which has seen a significant number of voids, or vacant properties, appear over the past few years, most significantly since the economic downturn.
These units are now considered too small for the retail industry that nowadays will be looking for larger units. Irrespective of the changes to empty rates, such properties will require reconfiguration in order to be marketable. It would be of significant benefit if the measures introduced in respect of new developments could also be introduced for such ‘redeveloped’ schemes.
Equally importantly, such moves would encourage investment in these areas and stimulate demand, recovery and regeneration of Scotland’s high streets.
The Scottish Government should, therefore, consider as a matter of priority the possibility of broadening the proposals currently on the table.
A move to encourage the redevelopment of existing stock would not only offer considerable assistance to landlords of existing property but also stimulate activity in the construction industry, one of the core aims of the measures announced by the minister.
Peter Muir is director and head of rating for Colliers International in Scotland.
A Scottish Parliament online petition was launched this week calling on the Scottish Government to review its decision to postpone the 2015 non-domestic rates revaluation to 2017. The petition can be found here