Business rates: 600,000 businesses escape tax

Anyone investing in commercial property needs to take notice of the changes to business rates. Sarah Moore explains.


London's business rates are set to rise by 14%

Next April, business rates (the tax paid on the occupation of non-residential property) are set to be revalued. That may not sound interesting, but if you're investing in commercial property you need to pay attention. Because, warns commercial property group Colliers International, the revaluation promises to produce the most significant changes to business rates in a generation, and could have a huge impact on property yields.

Business rates are calculated partly by the rentable value of a property. The last revaluation took place in 2008, right in the middle of the financial crash. The upcoming revaluation will be based on 2015 rental values. That means that businesses in London and the Southeast where values have recovered sharply are likely to be hardest hit, with rates rising by an average of 14% (and an incredible 415% on one street in Mayfair). However, regions outside of London will see an average drop in rates of between 2% and 11%, as government concessions exempt 600,000 small businesses from paying any rates at all.

A rise in business rates will reduce the level of rent a landlord is able to charge, because businesses will be less willing to pay higher rents if this also drives up their business rates, notes consultancy Regeneris. Lower rents mean lower yields for investors.

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This could also mean that landlords will be less willing or able to invest more money in the property in question, or elsewhere in the sector what Regeneris describes in its model as "potential development foregone". This would dent demand and therefore prices for commercial property in areas of the country where rates are set to increase.

However, Regeneris' research suggests that this relationship between rents and business rates is stronger in the regions than in London, and also has more relevance to retail outlets and retail warehouses. As a result, working on the basis that Regeneris' model works in reverse, this could mean that investors with exposure to retail properties in the North and the Midlands, where business rates are typically going to fall, may in fact benefit from the revaluation.

One potential play on this to investigate further could be Regional Reit (LSE: RGL), which focuses on commercial property outside of the M25.

Government to guarantee 15,000 extra houses

The hope is that the initiative will allow sites to be "built out" more quickly, says Sir Edward Lister, Chairman of the Homes and Communities Agency (HCA). With a guaranteed buyer in place, developers should be keen to accelerate their building programmes, putting up houses more rapidly. The fund will be paid for by additional government borrowing (if necessary), and will only be used to fund schemes built on public land.

Steve Turner, a spokesman for the Home Builders Federation, told The Guardian that he expected small firms and new entrants to the market to be the biggest beneficiaries: "The reason that you've seen the number of small builders fall by 80% in the past 25 years is that building has become a very risky business".

Chancellor Philip Hammond and communities secretary Sajid Javid have said that the fund has the potential to support the construction of an extra 15,000 houses on public land by 2020. And while it might sound potentially expensive, the fund should only be drawn on in "extreme situations". Lister told the Housing Market Intelligence Conference last week that the HCA would ideally "never spend a penny" of the fund, because developers "should be able to find buyers for new builds", notes Inside Housing magazine.

Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.