Expectations: winners and losers

In the lead up to the 2017 revaluation, media attention centred around the potentially painful increases in rating liabilities faced by occupiers in areas of significant rental growth. This was particularly pertinent to businesses in the fringes of central London, where rental values doubled in a few years reflecting economic renaissance and infrastructure improvements.

Less coverage in the lead-up was afforded to the many occupiers up and down the country who were quietly confident of a reduction in their rates bills. This is because, in many locations, rental levels in April 2015 had failed to recover from the previous antecedent valuation date in April 2008, the very eve of the global financial crisis and before rental values started to fall.

The revaluation reality: no clear winners

As it turned out, neither of the above camps actually stand to benefit very much from the new revaluation. This is because so-called ‘transitional arrangements’ (also referred to as phasing) used in England have done little to cap the full impacts of rateable value increases on the one hand, while on the other hand offer scant reduction in bills where rateable values have fallen.

Transitional arrangements

In England, a transitional arrangement scheme is in place for 2017-22 which limits both year-on-year increases and decreases in rates payable compared with the previous year. There are no transitional arrangements in Wales or Scotland. As the chart illustrates, there is significant variation in how the capping is applied according to the rateable value of the property.

Taking a property assessed with a rateable value of £100,000, if the rating assessment increased from 2010 then the bill for 2017-18 can increase to a maximum of 42 per cent (plus inflation) compared to 2016-17 before the cap hits. The cap applies the following and subsequent years. In 2018-19, the business will pay no more than 32 per cent (plus inflation) more than 2017-18 and so on.                    

While a stringent upwards cap is in place for occupiers in properties with a rateable value of below £100,000, the majority of central London’s office buildings carry a rateable value in excess of this, reflecting the high prevailing rents and proliferation of large buildings in the capital. Ratepayers in these higher value properties are only shielded from just over half the increase in rateable value in 2017/18.

However, the downwards cap in the transitional arrangement is equally as penal. Given the deterioration in rental levels after the global financial crisis, many ratepayers have arguably paid over the odds for years. Yet, despite this, capped reductions in rating bills are miserly. Occupiers in properties with a rateable value in excess of £100,000 face a downward cap of only 4.1 per cent in their rates bills in 2017/18.

Indeed, where there have been significant falls in rental values between the revaluations, there are cases where ratepayers will never pay rates based on just their rateable value and the multiplier (UBR in old terms). They are effectively paying a transitional supplement each year to subsidise the caps on rate increases elsewhere.

Out of kilter

The business rates figures for TOCS 2017 illustrate those locations where actual business rates costs in 2017/18 appear to be significantly ahead of the unphased level or, to put into other words, the market reality.

Of all the locations, for buildings with an rateable value over £100,000, Preston displays the largest gap in percentage terms between the actual phased rating costs and unphased, standing at nearly 40 per cent. The difference is acutely apparent in other locations in the North West, namely Liverpool and Warrington, where the difference stands at circa 25 per cent.

We can help

If you occupy a property (any type) with a rateable value above £100,000 , say for example £110,000 to £120,000, it would certainly be worth having that assessment considered by a rating consultant. If a reduction to below £100,000 could be achieved, the upwards cap would go from 42 per cent (plus inflation) to 12.5 per cent (plus inflation) and the downwards cap would increase from 4.1 per cent (less inflation) to 10 per cent (less inflation) and there would be reductions in your rates bills from 2017-18 onwards.

You should take advice on how transitional arrangements will operate for you. Calculations can be run to provide budget figures for 2017-22 on any property or any scenario. For more information, please contact Paul Easton, National Head of Business Rates, at Lambert Smith Hampton.

June 2017

What is the difference between co-working and serviced office space?

Co-working space is a relatively recent phenomenon from the US, and is an evolution of the serviced office model. Space is rented on a desk-by-desk basis within a shared open-plan, creatively designed environment, allowing the exchange of ideas and collaboration between the businesses in situ.

The more traditional serviced office essentially offers occupiers their own private space within a building, along with meeting rooms and reception areas. The boundaries are blurring however, with some operators providing both co-working and traditional forms of serviced offices within the same building, a system which allows small businesses to graduate from the co-working environment into the more private option if desired. The Office Group and WeWork are the leaders in this.

Flexibility and speed are the main advantage of serviced offices

Above all, flexibility and speed are the main drivers behind opting for a serviced office solution over a more conventional lease. For serviced office space solutions, contract terms typically run for a year, but can often be as little as two months and frequently negotiated. In contrast, conventional leases typically involve a minimum three year term, more typically five years, with the business liable for any dilapidations costs at lease end.

Other factors are speed; the contract can be signed within 24 hours compared to four to eight weeks for a traditional lease and as the serviced office comes complete with furniture and IT connection, companies do not have this added hassle and capital expense. Another key advantage is the ease of running the space on a day-to-day basis. Cleaning, recycling and refreshment services are typically included.

How much cheaper is a leased office, typically, compared with serviced providers?

It is commonly assumed that the flexibility associated with co-working and leased offices command a considerable premium. Typically this is the case – operators have to make a profit– but it is not always as significant as expected, particularly if you’re prepared to compromise on location and specification.

While costs may be cheaper over the duration of a lease, the upfront capital expenditure required to fit-out and furnish the leased space can also be prohibitively expensive. However, this is often partially off-set by rent free incentive periods offered by the landlord, which vary depending on the level of choice and demand at the particular time.

It is the add-ons that really make money for the operator – phones, meeting rooms, printing etc.

Leased offices - making your own mark

In addition to cost savings, another key advantage associated with leased offices is the ability to influence the space to your own requirements, whether in terms of layout, furniture or design. This allows a business to communicate its brand credentials more clearly . The other factor is the ability to create workspace that suits your identity and personality including private meeting rooms, dedicated reception, your own break out and soft seating areas, as well as occupying space not by desk numbers (which is typical of serviced offices) but by creative and inspirational zones, which could increase productivity. 

However, this advantage is also arguably being eroded by the increasingly sophisticated approach taken by a number of serviced office providers. While freedom to influence space continues to be constrained, operators are paying much closer attention to the space, which is designed to appeal visually as well as simply provide a functional work-setting.

Are serviced offices available in the very best locations?

Serviced office locations run parallel with conventional lease locations with the bulk of supply concentrated in London. On average 75-80 per cent of turnover is derived from London and providers are happy to occupy space on the same street but tend not to be in the same building. The centres tend also to be non-branded with each having a slightly different fit out according to the target market and micro location the centre is in. 

For more information about serviced offices and conventional leases, contact David Earle in Lambert Smith Hampton’s office agency team.

June 2017

While the Regulations apply to private rented properties with EPC ratings of F and G, tenants of D and E-rated properties should also be aware of the potential benefit of commissioning updated EPCs which, from a February 2017 study by Arbnco on Non Domestic EPC Re-Simulation Analyses, has proven to result in 33 per cent of D and E-rated properties dropping to F or G, as the graph to the left shows.

While these Regulations have been widely reported, many landlords have been slow to fully understand the potential impact on their portfolios, particularly now that well-advised tenants are identifying how they can use them to their financial advantage.

Here are some questions, which might be useful for tenants to consider.

My lease is due to expire, how can I use MEES to my advantage?

Dilapidations claims on lease expiry can be substantial and tenants are rarely prepared for them. By taking professional advice on the impact of the MEES Regulations on your dilapidations liability, it may be identified that you have little or no liability at the point of lease expiry.

This is down to the fact that where it can be proven at lease expiry that a property is in breach of the Regulations and requires improvement works, the tenant could argue that these improvement works will render some or potentially all of the dilapidations claim valueless and therefore the claim is actually zero.

What about when it comes to lease renewals and reviews?

Understanding your position with regard to MEES may also significantly bolster your negotiating position over break options, renewals and rent reviews.

Similarly to the dilapidations example, if as a tenant you can demonstrate that the property is at risk of failing if reassessed below the minimum required rating then, with expert advice, you may be able to renegotiate terms with your landlord in your favour. For example, using your right to exercise a break option, you could leave your landlord with a non-compliant, unlettable building, requiring potentially very costly improvement works. 

I’m in a modern air-conditioned office; the regulations won't apply to me

The MEES Regulations apply to all private rented property.  Many seemingly modern buildings constructed since 2000 will not comply and therefore be rendered unlettable.  Given the potential impact, tenants should not presume that their property will be unaffected.

Furthermore, the majority of current EPC ratings are widely recognised as being inaccurate.  This is due to the fact that they were first required in 2008 when a property was constructed, sold or let.  At that point, EPCs themselves were simply a means to an end of transacting a property and were often produced with little attention to detail. 

I know that the building I am in is compliant – it's a D-rating

Through consequent revision of respective EU and UK legislation, and cyclical tightening of the building regulations requirements (upon which EPC ratings are based), ratings have regularly been seen to result in a two rating drop when EPCs are reassessed.  Therefore, even if you know you are in a D-rated building, you may well find the building is re-rated F under current standards.

Surely these regulations aren't meant as a means for me to cause problems for my landlord?

The MEES Regulations are in place to bring about energy efficiency improvements to the least energy efficient private rented building stock in England and Wales.  They are enacted in UK law and, whether realised through direct penalties or tenants gaining the significant strategic benefits outlined above, will:

• Aid the UK’s long term energy security.
• Support the UK’s commitment to reducing greenhouse gas emissions.
• Prevent businesses and communities wasting money and resources.

How do I find out what my position is?

Ensuring that you understand your current position will enable tenants to protect themselves against substantial landlord claims for improvements and may open opportunities to drive their costs down.

To understand your current position, contact Lambert Smith Hampton’s MEES specialist, Rob Burke.

June 2017

The evidence speaks for itself

Happiness is a serious business. According to the Hay Group: What’s My Motivation? report, disengaged employees and poor health costs the UK economy around £6bn, and with only 15 per cent of UK workers reporting to be ‘highly motivated’, it is clear that organisations need to pay attention.

Creating environments that zing

So how exactly do employees ensure that their workplaces provide that elusive thing called happiness? Let's focus on some particular examples.

• Comfort and nature

Building design features have a positive impact on health, wellbeing and productivity.  And these elements form the foundation of basic human comfort.  

Consider comfort in two ways: physical comfort and psychological comfort.

The functional elements of an environment contribute to physical comfort. Access to daylight, controllable temperature, a place to sit. These are the things that that allow people to get work done, and link to productivity.

Psychological comfort is at a higher level, and contributes to increased performance. Permission to personalise space, feeling a connection to the company and colleagues, even a view of nature yields positive results.

Studies support the notion that some level of personal control over ambient physical conditions— temperature, light, noise—make workers feel more comfortable, happier, and more productive.

• Environmental engagement

Environments that encourage participation produce a climate of citizenship. They get people involved with keeping spaces clear of clutter and provide opportunities to contribute to the process of creating environments.

Employees who have control over the design and layout of their workspace are not only happier and healthier – they're also up to 32 per cent more productive, according to research from the University of Exeter.

• Conveying brand identity

Businesses are increasingly using their workspace as a means to communicate the values and culture of the organisation. With business having to work ever harder to differentiate themselves from their competitors, even more consideration is being taken on fit-out design to give a sense of kudos to their staff and visiting clients. As working practices become more agile, the office is likely to serve increasingly as a focal point for the face-to-face interaction between staff and clients, intensifying this trend further still.

Fulfillment is also important. Displaying the history, legacy and struggle of peers and the journey of the organisation reminds people of the purpose of the business they’re a part of.  Acknowledging contribution of the individual and team’s role in the organisation’s mission through physical expression can be a great motivator.

• Enhancing amenity

Within a multi-tenanted environment, shared amenities are important. The more familiar amenities include cafes, bike storage and shower facilities. Other types of amenity are also increasingly being provided, such as crèches and multi-faith prayer rooms, reflecting the increasing diversity and needs of today’s workforce.                  

• Social interaction

Relationships are important in the workplace and can be nurtured by ensuring that space is available for social interactions and activating spaces.  Bringing people together who might not work with each other on a daily basis - through common interest and downtime - creates social bonds that fulfil our need to connect with others.

Conclusion

Businesses are increasingly recognising that their space is a resource which can add value to their business. Happy employees work harder, are more effective and cost an organisation less than those who are disengaged or disgruntled. As Shawn Achor’s article on Positive Intelligence in the Harvard Business Review highlights, they create better bottom-line results with on average three times more creativity, 31 per cent more productivity and 37 per cent higher sales.

This article has been provided by Kursty Groves a workplace innovation consultant and an expert on the relationship between space, collaboration and creativity. To find out more, visit Kursty's website: kurstygroves.com

June 2017