As offices in the London face a record increase in business rates- 33% over the next five years- serviced offices are likely to become an even more popular option for companies seeking flexibility.
The increase has the potential to jeopardise the Square Mile’s drive to maintain its status as a key financial hub in Europe in the wake of the Brexit vote. According to leading business rent and rates specialist CVS, a total of 12 348 locations in the city will see their rates rocket from £876m to £1.6 bn- more than a third- over the next five years.
Large international corporates such as Goldman Sachs and Linklaters will be hit hardest by the increase, many of which are already wavering under the pressure of financial uncertainty caused by Brexit. The Bank of England, who occupy prime office space on Threadneedle Street, will face an increase of over £1.5m a year for its headquarters.
SMEs and retailers will also be heavily affected, when you consider that, after salaries, property rental is the biggest business expenditure. Core city fringe districts like Shoreditch and Old Street will be worse hit by the rise. Unlike the West End, they havn’t always seen huge occupier demand and have enjoyed lower rates.
Mayor of London, Sadiq Khan, deems the increase ‘unacceptable’, and has voiced his intentions to liaise with local London authorities in order to devolve more responsibility for tax to the capital. The move would ‘decouple’ London from national revaluation arrangements by allowing it to value its own property and set its own tax.
Sadiq Khan explains: “This reform would potentially allow us to avoid a repetition in five years’ time of the very large increases in bills which have arisen in London as a result of the 2017 revaluation. It would also provide us with an opportunity to ensure that the VOA [Valuation Office Agency] locally is adequately resourced to deal with the challenges of managing business rates in capital moving forward.”
What are business rates?
Business rates- or non domestic rates as they are also known- are taxes that tenants occupying commercial properties have to pay. These properties include: non-serviced offices, shops, pubs, warehouses, factories and holiday homes. Councils send out business rates bills once a year, in February or March. The amount owed depends on the “rateable value” of the property, which in London, can rise significantly each year.
Values are are based on the annual market rent value of the property and are reviewed every five years. The government postponed the most recent revaluation for two years, making the increase in London even more pronounced, where rental value in key areas has risen significantly following the financial crisis. On the flip-side, businesses occupying space in less affluent areas of the country will see their business rates cut.
Will serviced office tenants be affected?
In the short term, no. Business rates are included in the cost a serviced office agreement, alongside rent, overheads and services. Serviced workspaces are also very flexible: leases in traditional, non- serviced offices tend to be long term and binding, whereas serviced agreements can start from as little as one month. This gives businesses the freedom to scale up, down or move to a different location on an ad hoc basis- an invaluable advantage in an uncertain economy.
In order to protect the businesses affected, the government is putting plans in place to allow certain areas- London included- to retain 100% of their rates by 2020. However, some fear this could leave local authorities out of pocket.
This is very much a London predicament. In fact, around three quarters of businesses in England will see either no change or even a fall in their business rates in the next few years. The government has introduced a £3.6 bn transitional relief scheme to help those affected by the increase.