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For what it's worth - the importance of valuationsBy: Paul Giness

Paul Giness

Valuations - where do they count and, more importantly, what can they mean for a business? There are areas where valuations always have and always will be fundamental – sales, purchases and company asset valuations, to name the most obvious. But where do they come into play for the day to day endeavours of ordinary businesses?

It’s worth remembering that the rental valuation of a property is the single most important factor dictating the amount of business rates a company will pay. Obvious? Well yes, but few businesses are thinking proactively about it. It’s common for many to just dismiss business rating as an unpleasant inevitability.

Essentially, while the rating system is often perceived to be static and inflexible, the concept of value changes all the time with market conditions. In addition, the government is actively working to encourage regeneration and support small businesses. The crucial point is that, while businesses cannot change their rating, they would be wise to keep an eye to the reliefs that are available and be prepared to exploit opportunities at the right time.

So what challenges does the current system of rating valuations pose? From my perspective they are two-fold. Firstly, the fact that property values and subsequent revaluations are unavoidably linked to the specific economic times in which they are set, and secondly, that these rates are re-set so irregularly – only once every five years.

The last time a rating revaluation was undertaken the values adopted were based on rents prevailing in April 2008 – just before the full impact of the economic crash. That meant that rates were set at a very high level and have stuck there, regardless of the subsequent economic crisis and lack of recovery of confidence in the property market.

This has presented an undeniable, (four year long) challenge, particularly for the middle sized businesses where their rates liability could be a high percentage of overall costs and who aren’t eligible for Small Business Rates Relief either. There is potential light at the end of the tunnel because the next round of rating valuations will be taken and based on values in April 2013 in preparation for their implementation in 2015. And, importantly, many businesses will see them fall. However, despite this rosier forecast, the fact still remains that the ratings system is static and far from an exact science.

So what can be done? The reality is that the vast majority of British businesses are not going to change their agenda because of the value of their property and the rates they pay. What they can do however, is to get smart to the developing attitudes towards property value. Being smart about rating is not contained to reducing liabilities through appealing and maximising reliefs, such as empty rates, but endeavouring to understanding and take advantage of government initiatives.

The government is actively looking to help the situation to avoid vicious cycles where small businesses are unable to inhabit areas of high value and high business rates; while areas of low value and low rates remain perpetually degenerated. The most obvious example of this is small business rates relief, but there are some far more sophisticated examples such as the government’s new Enterprise Zones.

Enterprise zones are selected areas across Britain, stretching from the Scilly Isles to Tyneside, where the government is actively working to increase property value through regeneration and incentivising business population. A combination of financial incentives, such as a business rate discount per company of approximately £275,000 over five years, reduced planning restrictions and free Wi-Fi is encouraging businesses to move to these areas. The idea initially came from a similar scheme rolled out by Margaret Thatcher in the eighties which has made areas such as the London Docklands and Canary Wharf what they are today.

Looking to the future, there are also other factors which, in time, will affect a property’s value and the rates paid by its occupier. Things such as energy efficiency and the green credentials of a building could be the next big thing. The government has already demonstrated its interest in this area with their Energy Act 2011 designed to incentivise businesses to offer energy efficiency. It is totally feasible that the next step will be to include energy efficiency within a rating assessment.

This may all be a little speculative at this point; but it demonstrates a very tangible point: a financial director can really benefit from keeping a close eye on factors that will dictate property value in the future and getting wise to incentives, which could help them work around an inflexible ratings system.

In many ways rental values and the business rates they dictate can actually be a great yardstick for organisations. Attitudes towards valuations are constantly evolving and, if approached wisely, they can offer businesses useful insights into when and how to invest in property – it just takes some forward thinking.

About the author

Paul Giness is a senior consultant and lead property expert at ERA (Expense Reduction Analysts).                                                                   A chartered surveyor with 20 years’ experience in the property industry, he began his career with a national firm of chartered surveyors, specialising in business rates - an area that has developed into his core expertise. Paul likes to spend his days off with his family, particularly trips to the seaside or, on his preferred mode of transport, his bike.

Features August 2012

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