The government should override nimbyist objections, and put empty commercial properties to use as affordable housing. Some carrot and stick tweaks to the tax system would help force the hand of local developers
I live in Epsom, a classic commuter town about 30 minutes from London and full of increasingly expensive Victorian houses, ubiquitous dreary chain shops and the anxious middle classes. It is also becoming full of empty office buildings. My quick research shows that as of today there are over 250,000 square feet of available offices to rent in the town and some of these have been consistently vacant for about four to five years now. Lots of glass and steel clad buildings slowly becoming weed strewn and rusty whilst their owners no doubt rue the day they ever built them.
The other issue that dominants the local agenda is the lack of affordable housing for younger people, old people or just about anybody who didn’t scramble onto the property ladder in the last five years. Although we are some way away from the London bubble, houses prices have been consistently rising for a couple of years now and the government’s Help to Buy scheme will invariably make things worse.
You would think that as a community we would spot the connection between the lack of affordable housing for our twenty-something children and the eyesores of vacant offices in the heart of the town. With an average flat taking up about 600 square feet of space, we could easily build several hundred one and two bedroom flats. You would think this would be a classic win win but nobody is joining the dots on this one and the office blocks remain stubbornly empty.
The reason for this impasse is a combination of three things; not in my backyard planners, government policy and inertia on the part of the property owners. Let’s start with the fish in a barrel target that is the local planners. The thing about south east commuter towns like leafy Epsom is that a lot of the population have done ok out of life thanks very much, are living how they want to live and really don’t want things to change. The focus of the local political parties is not about aspiration or progression, but opposition and resistance to change - a sense of us versus an unknown but no doubt up to no good them.
Planning applications to convert redundant offices into flats are resisted because people living in nice detached four bedroom house don’t see the need to encourage other poorer people into one bedroom flats. We are happy that these people come into the town to clean our cars, pick up our litter and serve us coffee but would really rather they lived somewhere else if you don’t mind.
This is where big government should be coming into the picture. Local politics are too often so focused on local issues that don’t see the bigger picture and the role of central government is to step back and override these insular concerns in the pursuit of a wider good. We see this happening with Nationally Significant Infrastructure projects but this is all very focused on big boys stuff like bridges and nuclear power stations and airports and could as usefully be applied to more mundane things like empty office buildings of greater than say 1,000 square feet.
There is no point in stimulating the demand for housing via the Help to Buy scheme if the government does not also override the local planners to address the supply of sites, particularly in the south east.
Finally you may ask, where are the property owners and more tellingly their banks in all of this ? I think the reason that thousands of offices and shops stay empty is that their owners really cannot quite believe that those heady days of 2007 are never coming back. It has been a full five years now since the crash and a lot of developers are still sitting on properties built with big bank loans that they hoped to service by charging chunky rents to commercial tenants just like they used to in the good old days.
However technology and business culture have changed enormously in that short space of time and the prevailing trend is away from one man one desk to more flexible ways such as shared desks, communal spaces and the ever popular home working, the prevalence of which seems to track the weather and the cricket. My own organisation has just absorbed nearly 1,000 additional people without renting a single square foot more of space. Ok it’s a bit cramped now and I am physically closer to my colleagues during the day than I am when I sleep alongside my wife at night but it’s a lot cheaper than renting another office building in central London.
We see a similar shift in the dynamics of shopping. From the customer’s point of view, Amazon Prime must be the greatest labour saving invention ever. For those of you who have yet to stumble across this wonder, you pay a fixed amount of about £50 per annum and from that point on everything you ever buy from Amazon is delivered free of charge. This coupled with Sainsbury’s at home service means you never need to leave the house again and we see the predictable result in the boarded up shops on the high street.
I think the penny dropping event for the developers is to realise that this paradigm shift in work place organisation and shopping has happened and despite their patient waiting, the heady world of 2007 has gone. Unless they do something very differently, that big glass and steel space or that prime high street retail space sitting on their balance sheet is always going to be a liability and never an asset.
I also think the banks need to painfully come to the same conclusion. Most of these offices and shops are undoubtedly breaching loan to value covenants if not actual cash ones and the days of extending loans and pretending that none of this is happening cannot go on forever. Someday somewhere is going to need to painfully break cover and concede that for most empty office and shops in the suburbs, the building is now probably worth less than the mortgage. As we learnt before with sub prime, the longer the banks keep propping up houses of valueless cards, the more tears there will be when they eventually come crashing down.
This again is where government can come in with the carrot and stick of property taxation. It should encourage developers to change use by offering aggressive tax breaks on the capital work required to turn an office block into flats. We see similar tax breaks for contaminated land remediation so why not offer say a 130% tax allowance for the cost of the conversion. Back this up by a punitive stick that says for commercial property let unoccupied after twenty four months, there is a steep hike year on year in non domestic rates. Taking in conjunction, these two measures will do a lot to jolt landlords from their nostalgic yearning for 2007 and make them think more radically about what to do with their moribund assets.
So in conclusion, the increasingly common sight of boarded up shops and offices in commuter towns is evidence that although approaches to white collar work and shopping have changed significantly in the last five years, the market does not always quickly self correct. A combination of insular planners, self deluding property owners and wilfully blind bankers means that we have a lot of vacant space on the high street. At the same time, lots of people are stuck living with their parents well into their thirties and beyond.
The good news is that the government can probably change a lot of this with a couple of simple amendments to the corporate tax code. The bad news is that the prevalence of property developers and construction firms amongst the Tory party faithful makes any punitive tax changes this side of an election very unlikely.
Michael Ware is corporate finance partner at BDO. @michaelware13
