Rating Revaluation In A Post-Pandemic World And What An Inaccurate Rating List Might Lead To

A commercial office building, with many windows you can see through into offices The valuation office agency is currently compiling the 2023 rating list and, given we do not expect much in the form of relief from the Chancellor’s Autumn budget next week, this one could be inaccurate.

Many occupiers of commercial property are receiving requests for rental information for values to be considered, analysed and upon which rateable values will be set. When the next rating list comes into force effective 1st April 2023 the rateable values will be based upon the annual rent paid for a commercial property with effect from 1st of April 2021 but given the dearth of rental transactions and many commercial property sectors showing a decline in rental values this may be the most difficult rating list to compile to date.

The government was due to announce the result of their fundamental review later this month, but we understand that this is likely to be delayed yet again. There have been continued calls from many industry bodies for a significant reform of the business rate system and reducing the frequency of revaluations, making rateable values and hence rates paid more reflective of the ever-changing market.

It is likely that when the new rating list comes into force there will be a disconnect between the rateable value and the current market, given there will still be a two-year lag between the date the list comes into force and the Antecedent Valuation Date (AVD) upon which it has been compiled.

Many in the rating community will remember a similar situation for the 2010 rating list adopting an AVD of 1/4/2008. Most reading this will also remember September 2008 when the global financial crisis hit, with rental values plummeting and high vacancy rates across most sectors which continued for several years.

Rateable values in this instance were set against rental values pre-crash and the economic events after AVD were largely ignored under the rating hypothesis. This was a difficult period for many ratepayers and many struggled to understand why their rateable values were completely out of kilter to the rent they were paying for the same property.

The Royal Institute of Chartered Surveyors publishes quarterly property market updates which are helpful to give an indication of the quarterly and yearly changes to rental values.  Those published during 2021 give an indication across property sectors and opinions of where there will be likely increases and decreases in value and of course the current years reports most pertinent to the next rating revaluation.

It certainly doesn't take a genius to say that the retail sector has been the hardest hit since the pandemic started and the sector continues the general decline over recent years. The Q2 survey published by RICS appears to show a reduction in rent expectations from 2015 to 2021 be in the order of 40% albeit this is a broad outlook, and it is likely that secondary retail shopping centres will be hardest hit by falling rental values, with prime retail less so.

For commercial office space Rents appear to have held well for prime space, with secondary faring less well - as to be expected. Since the last AVD, rent expectations to 2021 are generally lower but nowhere near those seen in retail. The greater uncertainty surrounding office accommodation needs to play out further given many companies are currently considering their space requirements and flexible working policies which will impact space requirement and hence rental values. The RICS suggests that a 12% reduction in office footprints for many firms over the next two years is plausible from their investigations.

Industrial and distribution values have seen a significant increase in rents being paid with occupier demand driving rents higher due to the lack of suitable available space. The RICS have reported that 2020 was the highest level of take up on record at 28.1 million square feet on the 2nd highest take up on record in 2021 of 25.1 million square feet. This along with voids running at only 4.4% will likely put pressure upon rents driven upwards going forward. Given the AVD for the next revaluation being slap bang in the middle of the two record years and rising rents, there will likely be some big increases when the next reveal lands!



What does this all mean for the ratepayer?

We anticipate that for many in the retail and office sectors when the new rateable values are published for the 2023 revaluation there may still be a disparity between the rent being paid and rateable value for their property, particularly if values continue to fall. This may not be felt for prime property, but certainly in the secondary sectors of the market where there has been a death of transactions to properly assess what the rental value should be as of 1st April 2021.

Having a correct rateable value is one thing, but this is a means to an end! The actual rates paid may continue to include a complicated calculation called transitional relief which is a mechanism to limit the increase or decrease in rates paid between rating revaluations. It is therefore vital that ratepayers consider their rateable value currently in force in case a transitional scheme is brought in alongside the new rating list. If the current rateable value is incorrect, this may continue to impact the rate liability for many years to come.

The actual rates liability paid is also influenced by the rate in the pound (multiplier) set by government, also known as the uniform business rate (UBR). This is currently 51.2p in the pound and is the highest of any European country. Unless this changes then rates will still be an excessive burden for many struggling businesses.

Even if Rateable Values decrease significantly as expected in some sectors it may not automatically follow that the same percentage reduction will be translated to the liability paid.

The best way to mitigate and challenge your liability is to use a reputable agent with a strong track record.