Exploiting the value of property

Dr Kevin Muldoon-Smith and Dr Paul Greenhalgh ask how the commercial property industry can support the public sector in its effort to extract value from land and property. The value of land and property is increasingly significant to local government finance – but the valuation of both, and methods of taxation, need urgent reform in order to help fund local services and support economic growth. In recent years, the emphasis of local government funding has moved from generally well-funded, equal distribution controlled by central government, to local place-based autonomy associated with austerity and efficiency. It has been left to public sector administrators in central and local government to work out how welfare requirements will be delivered in the midst of a 77% reduction in finance by 2020. In large part, the property sector – taken to mean developers, agents, valuers, financiers, investors and property managers – has not taken part in this new world of public sector finance. This is a missed opportunity, given the growing interest in property tax, land value capture, infrastructure premiums, local asset-backed vehicles, bond mechanisms, direct property investment, more efficient exploitation of local authority assets, and the sweating of local anchor institutions in recent years. However, the debate around these methods has largely been confined to the spheres of public administration and economic geography. Consequently, although there is a clear wish from government to exploit the inherent value in land and property, there is no clear rationale for doing so and initial efforts have been beset with difficulty. Shaky foundations One of the government’s flagship devolution policies, the business rate retention strategy (BRRS) introduced in 2013, allowing councils to retain 50% of new business rates (and the more recent announcement of the 100% BRRS, planned for introduction in 2020) illustrates this situation. BRRS rewards business rate growth generated only from new property development – growth derived from existing property is stripped out. Furthermore, empty property taxation is rewarded more than taxation on thriving business centres – this is because empty property rates are levied on the maximum business rate multiplier rather than the lower small business rate. Moreover, only buildings with large floorplates generate tax as small businesses largely exist outside of the business rate mechanism. Within BRRS, there is an implicit assumption that new property development can act as a proxy for economic development. However, this is not borne out in reality. Those locations with buoyant rental levels, which can attract new commercial development, have an advantage over areas where demand is low and viability is a challenge. Furthermore, certain locations offering good job prospects – for example, the A19 corridor in Sunderland, which is dominated by Nissan, or the “golden logistics triangle” in the Midlands – do not translate into BRRS. This is because industrial property, although space hungry, does not translate into significant business rate income owing to its low rental value. Constructing a better system  Current efforts to improve BRRS mostly involve complex alterations to the underlying administrative system, for example redesigning the reset mechanism. However, such changes to the technical fabric of public administration will not alter the underlying flaws. In order to improve this situation, a more comprehensive debate, which unites property, finance and tax policies, is needed. Alarmingly, none of the major political parties mentioned BRRS in their election manifestos. Furthermore, the legislation that underpins 100% BRRS, the protracted Local Government Finance Bill, fell following the recent national election and was not included in the government’s legislative programme outlined in the Queen’s Speech. This hiatus gives the commercial property sector some time to reflect on, and influence, how BRRS can be improved to better support local welfare requirements, and how it can translate coherently into local economic development and industrial growth. An easy win would be for the commercial property sector to lobby government to reduce the rate of empty property rate taxation below the small business rate multiplier, as it would incentivise local authorities and landlords to promote small business growth, rather than reward dormant potential. It still remains the case that local authorities can potentially make more income from empty rates than business rates. More problematic, but potentially more rewarding, is to consider how the potential value growth of existing commercial property can be better captured. Currently, any new property value created through strategic economic development initiatives, for example improved design, individual place-making, infrastructure and transport, is lost. Meanwhile, the added worth derived from improvement in building performance, designed to deal with issues such as climate change, economic productivity and new ways of working, cannot be easily captured. The value of the commercial property sector     Business rate retention only accounts for 30% of local authority funding. However, it is unlikely that this policy, and its wider stated aim of incentive based financing, will disappear from policy. Given the recent announcements from the Local Government Association that local authorities would see a potential £5.8bn funding gap by 2020, it cannot. Local authority reliance on local property value and tax will only increase as a proportion of total spend as they fight tooth and nail to remain solvent and then to provide a realistic set of welfare services. Northumbria University has started a new research project, commencing in autumn 2017, that seeks to understand how the proceeds of land and property, and the expertise of the property sector, can better inform the funding of future local welfare needs in the UK. Alongside an international comparison of land and property-led public sector finance initiatives, we will be looking to capture the views of property professionals in relation to how the public and private sector can work together to better exploit the value of land and property. Dr Kevin Muldoon-Smith is a lecturer in real estate economics and property development, and Dr Paul Greenhalgh is an associate professor in real estate economics at Northumbria University