Historically, industrial or warehouse properties attracted no business rate liability if they were empty, and commercial properties paid 50 per cent after a three month holiday.  Investors, pension funds and businesses seeking to expand, could purchase or build knowing that the only holding costs of an empty property would be insurance and security. All that changed in 2008.  In the chapter of the pre-budget report entitled, without a hint of irony, “Supporting Business”, HMG considered that it was right to charge rates when properties stand empty, since this increased incentives to re-let and re-use empty property and avoided subsidising owners of empty properties. 

Suddenly, owners of empty properties faced a full business rate liability after three months for offices, and six months for industrial property.  In my view, this policy was spectacularly misconceived. There have been some instances in the last three years where existing stock has been offered at very little rent in order that the landlord could avoid an empty rate liability. But many landlords faced a double whammy of no-rental income and having to pay full rates.

To avoid rates, other, perfectly sound buildings, such as those at Exeter Street and Great Northern Road, have been demolished.  But of even more significance for availability of good quality stock in the future, new construction is not taking place.  Developers of a first class office building of, say, 4,000 square metres would see an annual empty rates bill of over £200,000, making a project bordering on viability entering the realms of economic madness. 

This lack of construction has other knock-on effects, principally those of employment, both in the construction of the development by contractors, sub-contractors, electricians, plumbers etc, but also in the dearth of new employers coming to Derby.  There is no building in the city which could accommodate a large space occupier requiring top quality accommodation ready for an autumn move.

There has been a period of relief, where properties having rateable values of less than £18,000 avoided most of the charge, but this has recently been cut to £2,600, bringing the vast majority of empty properties into liability. The British Property Federation considered that these properties were already in disadvantaged areas, bringing a further blow.

There are other hidden impacts.  Most of us looking at our annual pension fund statements will have seen a drop in value.  This is because many national pension funds hold large property portfolios, and the impact of empty rates has seen the government raiding pension funds to help plug the gap in the economy.  Even smaller investors with a couple of properties in their SIPP are affected.  So, fearful of tenants vacating, they are faced with accepting nominal rents which significantly eat into the value of the fund.
In essence, therefore, what seemed to be a good idea at the time is simply an economic time bomb, which will stifle economic recovery as the market improves.  There will be little available new stock.  New companies won’t relocate into the city.  Indigenous firms won’t move to new buildings, so will not release their own, and this lethargy finds its way down the property chain.

It’s time to abandon empty rate liability, and get property moving again.