Businesses that occupy office space need to receive reductions in their business rates given the longer-term impact COVID-19 and Lockdown has had on the sector, says John Webber, Head of Business Rates at international property consultant Colliers International.
Unlike businesses in other sectors such as those in retail and leisure/hospitality who have been given a one-year rates holiday and have been supported by various grants to help them cope through the COVID-19 pandemic, office-based businesses have received no rates holidays to date and only the smallest businesses have been able to benefit from the government grant scheme.
Webber points out that many businesses are now appealing their business rates assessments on the grounds of Material Change of Circumstance (MCC)*.
“We are seeing the number of MCC appeals go through the roof as businesses challenge their current assessments on the grounds of reduced profitability due to the pandemic. We estimate the number of MCC appeals to be in the range of 170,000 appeals currently.”
“We also believe most of these will succeed. COVID-19 has brought about an unprecedented disruption. The trouble is the time lag between a business paying its rates bill now and receiving rebated funds back from the VOA on a successful appeal. This could take a year.”
In the meantime, many such businesses, vital for the economy to revive, may falter or even in some cases go under. Webber feels it would be more sensible if the Government therefore gave a rates discount now and “cuts out the middleman” so that office occupiers are paying bills they can afford and what ultimately they would be paying anyway once the appeal rebate is taken into account.
The hardship in the sector is also backed up by analysis of the London office market. According to research by Colliers, space released back onto the London market by businesses looking either to downsize or to cut overheads has now reached 1.5 million sq ft. since April. This figure is expected to increase in the rest of the year, both post the wind down of Government furloughing support and also in the early part of 2021, as companies gain greater clarity on relocation strategies and new occupational densities.
And in terms of demand, London offices remains severely depressed. Prior to recent Government 'work from home' announcements, Colliers anticipated an uptick in demand in Q4 2020. However it now forecasts annual London transaction numbers to be at least 45% below the 10-year average (12.2m sf). Take-up in the year-to-date stands at just over 5m sq ft which compares to 9.3m in Q1-Q3 2019. Deals are just being put on hold or aborted as companies retrench their previous expansion plans given current economic uncertainty.
According to John Webber, “Many businesses in the office sector have been badly impacted by COVID-19;revenues have been hit and costs have risen, particularly as many businesses tried to adapt to new rules and regulations with the 'Safe return to the office' policyin the Summer. The Government’s latest policy calling for 'Working from Home' until next Spring has caused further disruption, often impacting on productivity, and we now have some city centre offices either empty or only partially occupied but rate payers still expected to pay full rates.”
This is not the first time John Webber and Colliers Business Rates Team has called for support for the office sector. Colliers was strongly vocal that the office sector received a three months business rates holiday during the Lockdown period - on the grounds that that staff in office-based businesses were not allowed to assemble together, nor to travel on public transport unless they were essential workers - but should work from home. This was effectively a 'prohibition of use'. So far this has not been recognised by most billing authorities in England and Wales, many of whom have sent in demands for full business rates payments.Businesses in Northern Ireland, by contrast, did receive the 3-months holiday.
“The current situation in England is not much better than in the Spring and at a time when many businesses are negotiating with their landlords as to rent cuts, and looking at other costs, it does not seem either sensible or fair that there is no shift on rates policy.”
The office sector contributes one third of the annual rates bill which totals around £26 billion. Given the retail, leisure and hospitality business rates holiday, Colliers believe offices are contributing to half the current business rates tax take – around £7 billion out of £15 billion. Offices in London contribute the highest across the country, with office-based properties in the borough of Westminster having a current rateable value of around £2.81 billion and in the City, £2.55 billion**.
* An MCC is a physical change that impacts the profitability or operational capabilities of a business. Currently we are in unchartered waters as to whether COVID-19 is an MCC and whether businesses outside of the leisure, hospitality or retail sectors will have any relief to their business rates.
** Following the 2017 Revaluation.