Concern has been voiced in the Scottish commercial property sector following an announcement in the recent Scottish Government Spending Review that rates relief for empty commercial property is to be reformed. The planned reforms are to lead to an estimated £36m saving to the Scottish Government over the three-year period of the Spending Review.

The proposals

The announcement as set out in the Spending Review is vague: "Empty property relief will be reformed to provide strong incentives to bring vacant premises back into use, reducing the prevalence of empty shops in town centres and supporting urban regeneration."

The detail of the proposed reform is yet to be revealed, but already voices in the property sector have been raised, questioning the sense of a reform at this point in economic history, and demanding, at the very least, a consultation on the proposals. There is concern that we may end up with the same reform as that in England and Wales.

Empty property rates relief was reformed in England and Wales on 1 April 2008 and the reform has not been a huge success: at least not as far as the property industry is concerned. Prior to the changes, the position in England and Wales was as it currently is in Scotland. Most empty commercial properties received 100% relief from business rates for the first three months during which they were unoccupied, after which a 50% relief applied. Industrial premises benefited from 100% relief for the whole time that they were empty.

Now in England and Wales relief available for empty commercial property is restricted to three months, after which the property becomes subject to the full rate for occupied property. The relief available for empty industrial properties has been restricted to six months.

What will be the impacts in Scotland if the same reform is introduced?

There may well be a negative impact on speculative development of commercial property. For developers of new property, any occupancy void following completion of a speculative development which exceeds three months (or six months if industrial), will have a considerable cost impact. The developer will have to factor in an additional expense to account for the rates payable for any void after expiry of the brief period of relief. The changes may well mean that new development will not be brought forward until an occupier has been secured.

Property investment is also likely to be affected, with a possible rates bill for unoccupied property acting as a significant disincentive to investors to purchase anything but the safest income streams. Smaller investors, with portfolios of lower grade or marginal properties, are likely to be hit hardest.

There is also a potential impact on already ailing high streets, with landlords of retail premises possibly being forced to let their property to less than ideal tenants, rather than leave premises unoccupied and face a rates hit.

Finally, some commentators are suggesting that this is an own goal by the Scottish Government because public sector bodies are the owners of a significant amount of empty office space in areas with high vacancy rates.

Commentary

The Scottish Government is faced with an unenviable task to balance their budget in a still uncertain economic climate. The temptation to save (or perhaps more accurately, to earn) £36m from reform of rates relief has clearly been too great to resist. Unfortunately, while the property industry is still in the doldrums and there are no major fair winds on the horizon, this reform is not going to prove a popular move and will only serve to cause more caution and further uncertainty. We can see no evidence of property owners not making significant efforts to reduce their vacancy rates, so the efficacy of the reform as an incentive has to be doubted.