Chart: Grocers and multiples to burn while Labour fiddles with business rates thresholds

One of the most complicated aspects of retail costs in the UK is the business rates regime, and it is set to get even more complicated next year. 

Retailers pay business rates based on the “rateable value” of their property. This is based on government estimates of how much the property would be worth if it were rented on the open market. 

As things stand, retailers pay a lower rate of 49.9p in the pound if their rateable value is below £51,000 and 55.5p in the pound if it is above that. 

That means a large store valued at £100,000 has to pay £55,500 per year on that property. A small store valued at £10,000 pays £4,990. 

Some businesses are also eligible for rates relief of up to 40%, which is capped at £110,000 for the entire business.

With me so far? Here is where it gets complicated. 

The government announced plans last year to change the regime in a bid to benefit the high street, with an additional lower rate for retail, hospitality and leisure properties rated under £500,000 and even lower rates for those under the existing threshold of £51,000.

That will be funded with a higher rate for properties sitting above that £500,000 threshold.

“This group represents less than one per cent of all properties, but captures the majority of large distribution warehouses, including those used by online giants,” said the Treasury in its explanation of the change. 

Unfortunately for the sector, that also includes a lot of major retail businesses.

In fact, property firm Colliers’ analysis of data from the Valuation Office Agency shows that 90% of the store portfolio of Tesco, Sainsbury’s and Asda sit above the £500,000 threshold (based on when these properties were last rated in 2021).

The chart below shows all of the retail properties Colliers found that exceeded the threshold, broken down by the type of building they are. The majority (59%) of the 3,220 stores are hypermarkets/superstores above 2,500 sq m. 

Rents have been trending upwards and that means when the government revalues these properties next year, based on data from 2024, those rates will increase even if the government keeps the higher rate at the current 55.5p in the pound.

Colliers estimates a 20% rise in rents would lead to a bill increase of £400m for those larger stores in the retail sector and a £600m rise when leisure is included, too.

It also points out that areas with disproportionately expensive property prices will likely be hit, with the West End and Knightsbridge in London facing a £61m increase in rates on higher-value properties based on forecast rental valuation changes. 

These are all estimates. The government has not yet set out what the rates will be and we also do not yet know where they will land on rental valuations. There remains hope that exemptions will be cut out for the retail sector. 

That being said, it is clear why retailers are so alarmed, given, as my colleague Hugh Radojev explained in his piece last week, Labour has long been selling the reforms as a net-positive for the sector.