Rates versus rents
We have long argued on this site, led by the indefatigable Tim Worstall, that business rates impact on landlords rather than their tenants. Government says that cuts in business rates helps high street businesses. The facts are more complicated. Let’s crunch some numbers.
The key study is Bond, Denny, Hall and McCluskey, “Who Pays Business Rates?” (Fiscal Studies, 1996). The 1990 switch to a uniform national multiplier was a natural experiment. Overnight, rate bills rose sharply in some areas and fell in others, for reasons unrelated to local property markets. The authors found that increases in rates put downward pressure on rents, while decreases put upward pressure on them.
From memory, their headline estimate was that roughly three quarters of a rates change showed up in rents within about three years. They could not reject the hypothesis that rents fall pound for pound with business rates. Their own conclusion was blunt: if the burden passes to landlords, much of the benefit of a cut accrues to them, making rates cuts a poorly targeted way to help business.
Later work points the same way, with caveats. Research by Regeneris for the British Property Federation in 2016 found the link between rates and rents is stronger in regional markets than in London, and appears to break down after 2008. That is notable given who commissioned it, though the post-2008 weakening matters. In a slack market with empty units, landlords lack the power to claw the gain back. The study’s own advice was that authorities should be realistic about the limited incentive effects of rates relief for occupiers.
The most recent serious study, Lockwood, Simmler and Tam (Warwick, 2022), uses small business rate relief, retail relief and empty property relief. It finds retail relief cuts vacancies by 85% and SBRR by up to 49%, and rental rates move in the opposite direction to vacancy rates. So reliefs fill shops and push up asking rents. It does not give a clean percentage split, though.
The Valuation Office Agency has also looked at this directly. It studied the effect of rates relief in enterprise zones in 2006, then the effect of SBRR on the rental market, because it needs to know how reliefs feed into the rents it uses to set rateable values.
The overall finding is that about 75% goes to landlords in the medium term, possibly all of it in the long run, with tenants keeping more when the market is weak or leases are long. Retailers on long fixed leases pocket the cut until the next rent review. After that, the landlord collects. The Treasury cuts rates to help the high street. The high street says thank you, and forwards the cheque.
Madsen Pirie