RATING THE I&L SECTOR: WHY LANDLORDS SHOULD BE MORE ACTIVE WITH THEIR OCCUPIED ESTATE

1^st April 2024 marked the Antecedent Valuation Date (AVD) for the 2026 Business Rates Revaluation; the common valuation date on which all commercial properties in England and Wales will next be valued for rating purposes.

It also marks the first time that the AVD has landed only three years after the previous valuation date, with measures to increase the frequency of rating revaluations as part of the government’s wider efforts to improve the system.

Revaluations used to occur every five years. General elections and global pandemics gave rise to seven- and six-year revaluations respectively, and with them, there was louder criticism of the tax’s ability to keep in step with the market.

Shorter revaluations should, by implication, allow the system to do this more effectively by removing the delay from one revaluation to the next.

But criticism of long revaluation periods generally only comes from sectors in decline, with ratepayers desperate to rebase their liabilities on real world rental values rather than those set during rosier times.

Industrial and logistics has, by comparison, outperformed the office and retail sectors in demand, occupancy and rental growth since the start of 2015. The widespread and substantial increases in industrial rental values in the run-up to the 2023 Revaluations valuation date of April 2021 have given rise to equally significant increases in rateable values. Compounded by a multiplier that shows no sign of decreasing, liabilities have grown exponentially, with only modest protection afforded to ratepayers by the ungenerous transitional relief scheme.

This growth is only set to continue. Prime logistics rents have seen an average increase of 42% from the previous AVD (1^st April 2021) to the next (1^st April 2024). This annual growth over that period outstrips the 30% growth rate for the years up to the previous April 2021 AVD, particularly in major hubs such as Park Royal, Heathrow, Hemel Hempstead and Enfield. This is despite occupier take-up reducing from 90 million sq ft to 45 million sq ft and availability increasing from 4% to 6%.

Demand in the multi-let sector has been marginally more subdued, however it has still seen average national rental growth increases of 30% from April 2021, particularly in London and the southeast, generally driven by continued under-supply in key markets.

It must be noted however that although the average increases of 42% for prime logistics and 30% for the multi-let sector are only averages whereby some locations may have seen far greater (or lesser) increases and the Valuation Office should have regard to specific rental transactions when carrying out the 2026 revaluation.

More frequent revaluations allow the Valuation Office Agency to reflect these higher rental values in assessments sooner, increasing occupiers’ total liability over the course of their tenancy.

Higher rate liabilities bring with them higher occupancy costs and may, in turn, have a depressing effect on an asset’s rental value or, indeed, its attractiveness more generally. And so, even though void rates remain low, landlords may find it more difficult to let space or retain existing tenants, especially on poorer or more compromised accommodation, thereby increasing their exposure to empty rate liability as well as the challenges of reletting second-hand space. That, coupled with recent changes to the empty rates regime (increasing the “reset period” from six weeks to 13 weeks and reducing a ratepayer’s ability to mitigate exposure to unoccupied liability), could make for more challenging times ahead.

So, what should industrial landlords do to best prepare themselves? Proactivity is key, and we would recommend that landlords:

1. Review occupational leases to establish if values attributed to a property’s assessment are fair and accurate. Ensuring the 2023 assessment is correct will reduce the occupational costs for existing tenants, removing drivers to relocate, and will improve the liability position for 2026 assuming government continues with a transitional relief scheme.
2. Support tenants in securing improvement relief following qualifying works undertaken either by the landlord or their tenant.
3. Ensure all opportunities to delete assessments during landlord refurbishment/ redevelopment works are explored, limiting liability on vacant space.
4. Implement compliant rate mitigation schemes on vacant units to reduce liability through the unlocking of a 6-month empty rate relief period.

The focus should not just be on the vacant properties. In the current market, it is increasingly important that landlords take a more active role in reviewing assessments on their occupied estate.