Property Articles | Real Estate Articles

Almost all office occupiers in central London will see a large rise in their business rates bills as a result of the 2010 Rating Revaluation. 

However, these rises are likely to include a number of inconsistencies that should be challenged as quickly as possible to avoid being overcharged.  That is the message from property consultants, Cluttons in this latest report on the Government’s Rating Revaluation planned to come into effect on April 1st 2010.

While other parts of the country will not be immune to business rate rises as a result of the revaluation, it is London, but in particular central London, that will bear the brunt of the rises. This follows several years of strong tenant demand and rising rents, which began in the depths of the post dot.com recession, when office rents were close to historical lows in central London and ended close to the market high just before the collapse of Lehman Brothers and the start of the current recession, which has seen rents fall substantially across the board but sadly outside the period of the revaluation.

According to the report the rating revaluation, which covers the period from April 2003 to April 2008, will increase business rates significantly for those occupiers in areas where there has been a substantial increase in rents over the corresponding period covered by the revaluation.  In particular, those central London offices areas, namely Mayfair and St James’s, which have experienced some of the highest rental increases over the revaluation period are set to witness some of the greatest rises in business rates bills.

However, whilst the research sets out the likely average percentage increases in business rates, it is at pains to point out that the micro nature of the central London office market, where rents can vary significantly from street to street and building to building, could lead to large disparities in rating assessments and will provide rating surveyors with considerable ammunition in challenging rating assessments.

Although, the Department for Communities and Local Government (DCLG) has published its own estimates for the likely changes in rate demands (before accounting for inflation) for 2010/11 compared with 2009, it expects the London region to experience the greatest increase in rates rises, with the office sector faring worst of all with an average rise of in excess of 19 per cent expected.  However, Cluttons research suggests that the DCLG estimates may be conservative and that some central London locations will in fact experience far greater rises.

Whilst the Cluttons’ research is supported by figures from the IPD Monthly Index, which has seen London office rents increase by 29 per cent on average in the corresponding period covering the revaluation, with some prime rents up by over 100 per cent, it is not possible to generalise as each location is different and any number of factors maybe needed to be taken into account before arriving at a fair revaluation. 

In fact according to Peter Chapman, Head of Rating at Cluttons, some of the micro markets that make up the West End office market are likely to witness rates rises of considerably more than the 100 per cent forecast.  In particular the St James’s market, which has seen some of the most spectacular rent increases in recent years and the highest market rent of £125 per square foot, is expected to see rates rise by 115 per cent in north St James’s and by 136 per cent in the central St James’s enclave.  However, by contrast eastern St James’s, where rents rose by far less than its more expensive neighbours, is expected to see rates rise by a maximum of only 26 per cent.

Unfortunately with its limited resources and lack of available data, the Inland Revenue is likely to adopt a more broad brush approach when assessing the new 2010 rates.  It is for these reasons Cluttons recommends all central London businesses seek professional guidance with their rating assessment and seek to appeal any 2010 assessment as soon as possible. 

Furthermore the property market having weakened as a consequence of the economic downturn, the dramatic decline in occupational demand, and the rise in availability in central London since 2008, has had a considerable impact on rental levels and incentives.  Since the end of the valuation period, the sharp downturn in occupier demand across the West End has led to falling rental values during 2008 and 2009.  Top rents fell from £125 per square foot in late 2007 to £80 per square foot in April 2009 and to £75 per square foot in September 2009.  In addition, the increasing supply of new offices delivered over the last 12 months and in the immediate pipeline has compounded the effect of a downturn in occupational demand to drive up vacancy rates, which are now over 7 per cent compared with just 3 per cent at the height of the market in 2007 in the West End.

As a consequence of falling rents and an increase in supply, property owners have also been forced to offer increasing incentive packages to attract tenants into vacant space, with 18-24 months ‘rent-free’ now typical for a 10-year lease.

Although economic factors cannot be taken into account in any appeal, there are a number of physical factors as a result of the recession which will give rise to an appeal and these should be explored expeditiously as it is unlikely that the Inland Revenue will be fully conversant with this information and mistakes are expected.

As Cluttons research into the variances that exist in the St James’s market shows, rating assessments for a large majority of central London office occupiers could well be decidedly out-of-step with the latest market pricing and so businesses in the capital will be required to pay significantly higher rates for the five-year period from April 2010.  Given then these dramatic differences in rating increases across such a small market as St James’s, it is clear that there is a significant opportunity to challenge rating assessments across central London as well as many markets in the UK.