National and local policymakers need to pay close attention to the signals that revaluation is sending on the health of the urban economies of England and Wales.
Last week the Valuation Office Agency released the updated rateable values for all commercial properties in England and Wales from April 2023. Although the commentary focused on business rates, the relative relief granted to high street retail and the higher rates placed upon industrial and logistics space, far more can be drawn out from this semi-regular revaluation.
By comparing the draft 2023 non-domestic ratings list to an updated and cleaned version of the 2017 list from earlier this year, it is possible to see how the revaluation has changed rateable values across cities.
These altered values are ultimately reflections of changes in the demand for space from firms and consumers, both within cities and across the country. Even leaving aside the immediate implications for local government funding and finance, both national policymakers and local leaders need to pay close attention to the signals that the revaluation is sending on the health of the urban economies of England and Wales.
The newspapers’ angle that rateable values have fallen for retail is correct – and unsurprising after several years of distress in the high street property market – but the scale of the change is striking. Figure 1 shows that the rateable value of retail has fallen in every city centre apart from one (Aldershot).
Source: Valuation Office Agency, 2022
At first glance though, there is no obvious geography. Bradford, Stoke, and Middlesbrough have each seen average rateable values fall by 39-40 per cent, but they have also fallen by 28 per cent in Oxford, 29 per cent in Cambridge, and 35 per cent in Slough.
The retail sector’s decline is not a North-South problem, but an urban problem. Figure 2 shows that the average rateable value of a square metre of city centre retail space fell from £251 to £200 from 2017 to 2023, a 20 per cent fall. The decline in city centres was much more severe than across cities as a whole (-13 per cent) or non-urban areas (-8 per cent). This reflects a sharp decrease in demand from consumers for city centre retail, reflected also in structurally high city centre retail vacancy rates.
Source: Valuation Office Agency, 2022
So, is there anything riding to the rescue for city centres? Figure 3 gives us mixed news. Food and drink (minus hotels and pubs, which are excluded from the VOA dataset) also saw a decline in average rateable values with falls in most cities, despite significant claims that consumers now want “experiences” from their city centres.
Source: Valuation Office Agency, 2022
While high streets are struggling the above chart also shows average city centre office rateable values increased by 6 per cent from 2017-2023, despite the impact of Covid-19 on city centre commuting.
Looking deeper within this, the geography of the change appears to be one of very muted increases in London’s office rateable values (6 per cent) and declines in a few specific cities such as Bradford (-7 per cent) Middlesbrough (-12 per cent) and Portsmouth (-18 per cent), and more rapid increases in certain high demand cities, including the big conurbations of Birmingham (20 per cent) and Manchester (28 per cent) and some smaller cities in the Greater South East such as Reading (26 per cent), Luton (30 per cent) and Oxford (63 per cent).
If we plot the new rateable values for office space in city centres in 2023 on a map (Figure 4), the geography of the national economy immediately leaps out. Rateable values – and hence demand – for office space are highest in the large cities and small prosperous cities, mostly close to London. Demand and rateable values are high in these locations, as they offer unique benefits for the highly specialised services in which the UK has strengths (exporting or tradable services such as finance, tech, advertising etc.).
Source: Valuation Office Agency, 2022
Together with declining rateable values for high street services, city centres are becoming relatively less important as places of consumption but retain key strengths as places of production. Growing cities are seeing sustained demand for office space in their centres and will need to provide more if they are to keep local costs under control and play an important role in the national economy.
The shift towards production in city centres is matched by a similar shift out in the suburbs. While the suburbs do not offer the same benefit that city centres do for most kinds of highly specialised office work, they do offer cheaper land to industrial and logistics businesses that need lots of space and good transport infrastructure.
Figure 5 indicates that demand for both types of space has risen over the past six years. As commentary has already highlighted, this results in a higher business rates bill for online retailers, but also for the logistics sector more generally.
Source: Valuation Office Agency, 2022
Again though, the geography of the change in rateable values is important. Although commentary sometimes suggests the idea that Northern local economies should double down on manufacturing and logistics, this is not backed up by the data. While the average rateable value of a square metre of warehouse space increased by 42 per cent in cities in the Greater South East, it only increased by 27 per cent in cities elsewhere. We have seen a similar geographic divide in industrial space (33 per cent to 23 per cent).
Furthermore, the drivers of demand for new warehouse and industrial space are urban, not regional. Plotting the change in warehouse rateable values on a map, we can see a pattern emerges where the highest increases take place in and near London, followed by Manchester and Liverpool and the urban areas near them along the M6 motorway.
Source: Valuation Office Agency, 2022
This could be for two possible reasons. First that access to the large labour and consumer markets of London and the urban North West are a particular priority for the logistics sector. Second, the extensive green belts around London and the cities of the North West might be putting the squeeze on warehouse space, just as they currently put pressure on housing affordability.
While the revaluation of rateable values has made it straightforward to analyse the changes taking place in local property markets, it also has other consequences.
Its impact on taxation is progressive, with less valuable property receiving a tax cut and more valuable property having to pay more business rates, which are subject to semi-regular revaluations, now stand in stark contrast to council tax, which remains stuck at 1991 values, has become increasingly regressive, and does not adequately fund local government. In addition, councils are now encouraged to use their small degree of business rates retention powers to supply more high-demand property and collect higher local revenues.
However, the lion’s share of local business rates revenues flows out of the local authority to either other councils or national government. This reduces the incentives for councils to take decisions that boost the local (and thereby the national) economy. Council tax likewise provides poor incentives for growth due to lack of local control and incorrect valuations.
Centre for Cities has previously proposed various reforms to business rates, including removing excess reliefs, conducting annual revaluations, and sharing liability with landlords. The revaluation of business rates shows that reforming local taxation can advance equality and provide better growth incentives. Similarly, advancing fiscal devolution further and ensuring councils have more control over business rates and council taxes will help reduce divides and build national prosperity.
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