Capital gains office appeal: The next rates review looks set to shift occupier costs in London's favour. Tom Stevenson reports

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NEXT year's property rating revaluation looks set to be a political hot potato, a re-run of the controversial introduction of the Uniform Business Rate in 1990.

The bills, which will start arriving next March, will signal a radical redistribution of the costs of property occupation around the country, shifting the balance away from the North and making London in particular, more attractive as a location.

For many small businesses especially, the adjustment will be a sudden and painful one; average office rate bills in areas such as Birmingham may double.

The Government has acknowledged the need to make the shift more palatable. But talks are still in their early stages, and the eventual shape of any phasing-in arrangements is far from settled.

As figures from Grimley JR Eve, the property agent, suggest, occupation costs in London look set to fall sharply.

That may boost the nascent development cycle in London, transforming the economics of building new property, especially if lower rates allow landlords to increase rents without pushing up the overall cost of occupation.

Shortage of space in central London is already pushing rents higher, prompting some developers to dust off plans. Lower rates could accelerate that trend.

The revaluation could also make London a more attractive location for foreign companies aiming to relocate within Europe.

Higher rate costs elsewhere in the UK, however, could threaten the early stages of the economic recovery; hence the need for some sort of transitional arrangement.

But sharing out the gains and the losses is likely to prove difficult. A potential north/south divide exists, with the country's manufacturing heartlands facing big rises while office occupiers in the capital's service industries could be big beneficiaries.

Business rates, which are based on the market rents that a property would attract at the valuation date, make up a large proportion of total property outgoings, especially for central London offices.

Grimley Eve estimates that rents (taking into account rent-free periods and other discounts) for modern offices in the City of London are about pounds 27 per square foot.

On top of that, tenants are likely to pay a service charge in the region of pounds 6 per square foot plus rates. These currently work out at about pounds 25 a square foot in the City and pounds 21.50 in the West End.

London rates therefore represent between 37 per cent and 47 per cent of total property outgoings. Across the country, however, companies might typically pay less - about 25 per cent in rates.

The reason the figure is so high in London is that rates are calculated as a proportion of rateable value (currently 42.3p for every pound of the estimated market rent) at a given valuation date.

The last time rates were reassessed in 1990, the valuation date used by the Valuation Office, part of the Inland Revenue, was 1 April 1988. At that time (1988), the City market was close to its peak and the West End was rising quickly. Rents peaked in both sectors at more than pounds 60 per square foot.

According to Grimley Eve, rates may fall to less than pounds 10 per square foot in the City and West End because next year's revaluation will use April 1993 rents as its benchmark. That was close to the trough, when the property market was extremely depressed.

In the provinces, almost exactly the opposite trend has prevailed over the past five years. Rents in Manchester and Edinburgh have risen sharply over the period, which could mean big increases in rates next year.

Rates in the South-east are set to drop by pounds 1.45bn a year, according to research by Hillier Parker, another property agent. Inner London offices alone could pay up to a pounds 1bn a year less to the Government, a saving of up to pounds 17 per square foot for some occupiers.

For a company occupying 50,000 square feet in the City or West End, that could mean a reduction in property bills of almost pounds 1m a year. But in the Midlands, bills could rise by 30 per cent with some occupiers facing doubled charges.

The bar chart shows the potential impact on a range of companies around the country. The figures are based on real examples compiled by Grimley Eve from valuations it has conducted for its clients. All cases assume an air-conditioned office of about 14,000 square feet.

For the companies outside London, the impact of the changes is more dramatic than for the London occupier because the UK system of upward-only rent reviews ensures that, although rates bills will fall in the capital, the rent paid by existing occupiers will remain pegged at the high 1988 level.

In the provinces, companies face a double-hit. Their rates bills will rise and, after the next five-yearly review, so will their rent. The differential between London and provincial rents will therefore narrow.

Although the companies in the table show the effect on office occupiers, industrial companies face similar rises and falls. In the South-east, where industrial rents have fallen over the past five years, rates could fall by 20 per cent. In the Midlands and North, however, rises of between 40 and 50 per cent are on the cards.

The retail market has been less affected because rents have been more stable through the recession. With the exception of outer London and the rest of the South-east, however, rates are set to rise by between 10 and 20 per cent.

Hillier Parker thinks the net revenue the Government derives from rates is likely to remain broadly unchanged because rises outside London are expected to make up for lower income from the capital.

With the new rates due to come into effect next April, however, the Government is running out of time to work out a satisfactory way of easing the introduction of higher rates without forcing the beneficiaries to subsidise any system of phasing.

After the last revaluation, upward movements were capped at 20 per cent a year, which Hillier Parker estimates could cost the Government pounds 1bn in 1995/96 if reductions are implemented in full. If rises are limited to 10 per cent, the cost could rise to pounds 1.3bn.

The level of government support would fall sharply over the five years before the next revaluation, falling to just pounds 200m in year five with a 10 per cent cap. But it is thought that the Treasury's instinct is that the rating system should be self-financing and it is unlikely that support on that scale would be forthcoming.

To be self-financing, the Government has two options. It can raise the level of the Uniform Business Rate it would otherwise have charged (without phasing, agents estimate the UBR at about 40p in the pound next year), or it can phase in reductions and increases.

Whichever option it choses, the Government has a problem. As there have to be losers as well as winners, someone is bound to complain. And if last time is anything to go by, they will do so very loudly indeed.

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