London – The forthcoming revaluation of UK business rates is likely to increase the relative attractiveness of regional and secondary properties, says Richard Peacock, co-manager of the £435m* Kames Property Income Fund.
The 2017 rates revaluation – which assesses the rates payable by occupiers of property, or where commercial buildings are empty, by the landlord – is due to come into effect on 1 April 2017. It is the first revaluation since 2010 and reflects changes in rental values between 2008 and 2015.
“The last revaluation was calculated when the UK economy was still struggling with the effects of the Global Financial Crisis,” says Peacock, who co-manages the fund alongside Kames’ property investment director David Wise. “Accordingly, the impact of the revaluation will not be felt equally across the UK and locations or sectors that have seen higher rental growth over the period to 2015 will see higher increases to be absorbed by occupational markets.”
Most exposed to significant increases in rateable values are central London offices which have seen very strong levels of rental growth since 2009. While core locations such as the city and West End are expected to see average increases in rateable values of approximately 20%, Peacock says some fringe central London areas such as Shoreditch or King’s Cross – which pay significantly higher rents because they only became established office locations in recent years – will be even harder hit.
“Increased rates bills at a time when rental levels are at record levels mean total occupancy costs for central London office tenants have never been higher,” Peacock says. “This will dampen tenant demand and put downward pressure on an already well advanced rental cycle which heightens the risk of rental value falls.”
Regional markets, on the other hand, are less affected by the rates revaluation with rental levels in some locations only now recovering to the levels witnessed in 2008. “As a result, the rates revaluation is less likely to depress demand in regional areas and for office occupiers looking to relocate, regional locations look even better value, so we expect the process of decentralisation and northshoring out of London to continue,” Peacock says.
A further dynamic in the revaluation is that prime properties will see the largest rateable value increases. Peacock points out that the rental growth cycle tends to affect prime property first with rental growth in secondary properties lagging by a few years as tenant demand broadens. “Consequently secondary or active value properties will not see the same level of rateable value increases as prime assets despite the strong rental growth that active value properties have seen in the last few years,” he says. “This will reinforce the attractiveness of secondary property on a relative value basis for many occupiers and should drive further tenant demand for active value properties.”
The Kames Property Income Fund is tactically underweight to central London offices with the portfolio focused on regional locations, meaning both it and its occupiers are less exposed to the impact of the rating revaluation. Since launch in March 2014, the fund has returned 20.54% compared to the Sterling Property sector average return of 12.02%.
 According to Kames Capital’s latest factsheet, dated 31 December 2016, the fund has returned 20.54% since launch, versus the median return of 12.02%. Source: Lipper, noon prices, GBP, as at 31 December 2016. Figures are ‘percentage growth’ (%), total return net of annual management charge (single swinging priced funds, NAV to NAV) (dual priced funds, bid to bid). Kames Property Income Fund, B Gross (Acc) shares. Past performance is not a guide to future returns. Outcomes, including the payment of income, are not guaranteed.