As the nation gears up to vote in its new government on 8 June, Revo chief executive Edward Cooke comments on the growing need for change in the retail sector.
Now that the snap general election is upon us, all eyes are on which government will negotiate our departure from the European Union, and how it will do so. Retailers will be assessing the potential consequences on their cost bases as well as their ability to secure business in the existing European Economic Area, but also the broader international market.
As the retail sector and policy makers strive to understand how the systems in which businesses operate are changing, it is vital those businesses adapt and change themselves to remain productive and profitable. Technology is changing our shopping behaviour – from search, to purchase, to collection – and business models need to adapt to this. Physical stores undeniably still play a crucial role in retailing, and more than 90% of retail sales still involve shops in some way, but stores could lose out if property companies, their advisors and, critically, policy-makers, fail to evolve with the market.
Following research Revo undertook recently with leading retail property company Intu, we know that the most significant barrier to global retailers investing in UK markets is the current property tax regime. It is not a surprise that, after surveying more than 130 senior global retail chief executives and chief financial officers last year, we found the main barrier to entry into the UK market is the cost of business rates.
The business rates system remains largely unchanged from when it was introduced in 1990. The uniform business rate was 34% back then. Now it is 48%. The government maintains its position that this tax does not increase in real terms as it is adjusted for inflation annually, and commercial property is also revalued every five or, most recently, seven years. But the reality is that revenue from the tax is expected to increase from around £29bn in the last financial year, to £33bn in 2020-21. The tax was designed well before anyone had dreamt of a mobile phone small enough to fit in your pocket, when Steve Jobs was designing enormous desktop computers, and it is subsequently now moribund.
The elected government needs to look at business rates in a similar way to how it views corporation tax. In the past few years, chancellors have used corporate tax as a strong political narrative around the UK being an attractive place for companies to invest in and grow their businesses – so they continually reduce it. Indeed, when the government reduced corporation tax, tax revenue rose. The corporation tax rate is now globally competitive and further reductions are unlikely to see the same flow through in terms of tax revenue. The government must take a similar approach to business rates to ensure the sector becomes more competitive.
A more realistic, market-facing approach to plan-making is needed
Central government has also reduced funding for local authorities over several years, and many cuts have been made in economic development and planning departments. This has had consequences on speed and quality of decision-making. The government must look at working with industry to ensure local councils have skilled people, and enough of them, to plan for investment and development – both housing and commercial, which clearly complement one another.
A more realistic, market-facing approach to plan-making is needed. Councils evidently still plan to retain a high percentage of traditional retail fascias in towns or city centres. While it is important to retain a healthy number of A1 retail units, the reality is there are fewer and fewer of this kind of retailer, giving way to more leisure and dining options.
Moreover, physical places need capital investment. This might take the form of improving digital infrastructure, keeping buildings looking fresh externally or investment in the public realm. On the whole, we believe more public infrastructure funding should be allocated to smaller scale infrastructure, not just big projects like Hinkley or Heathrow – important as they are, locally deliverable infrastructure would benefit local communities enormously.
As the market shifts, the importance of partnerships is greater now than ever. Local authorities, developers and retailers need to collaborate on local initiatives to keep up with the speed of change and bring together local interests. When parliament returns, we hope to see a step in this direction as property owner business improvement districts (BIDs) are hopefully put back onto the legislative agenda, where property owners will have more say in forming BIDs and developing local economic development plans outside London.
We regularly engage with the Treasury and the Department for Business, Energy and Industrial Strategy. We have meetings with both of these set up in coming weeks, and are keen to promote UK sector abroad by engaging with the Department for International Trade. The government must seize the opportunity to strengthen the sector, and we are ready to work with whichever party (or parties!) forms a government.
Edward Cooke is CEO of retail property body Revo