London businesses worried about the cost of business space

More than half of London companies have business space concerns, according to a recent poll carried out by ComRes for London Chamber of Commerce and Industry (LCCI). The survey found that 55 per cent of London’s firms are worried about business space – matching the figure recorded in last year’s survey. The most frequently cited concern was rental costs which was identified by 35 per cent of London businesses, ahead of business rates and utility costs.

LCCI sees business space as one of the key issues facing the capital’s business community. Indeed, in order for small businesses to be competitive, it is imperative that they are not overburdened with inflated rate and rent rises. Whilst this issue affects businesses of all sizes, SMEs have more to lose. Without the financial resources often enjoyed by larger companies, the cost of business space eats away at SME profits causing substantial margin erosion and limiting growth. As SMEs account for most of London’s business community, addressing this is pivotal to the capital’s economy.

LCCI has therefore called on the government to take practical measures to allow businesses to grow in the capital.

Business rates

There should be a fundamental review of business rates to ensure the tax remains fit for purpose in today’s digital age. Amid the rise of online shopping, there has been a squeeze on high-street profits leading to many high-profile retailers shutting up shop. At the same time, the online-exclusive model has given rise to a number of successful businesses that contribute much less to the business levy, owing to the need for fewer concrete outlets at fewer central locations. Consequently, deriving business rates exclusively on occupied properties looks increasingly disconnected from London’s economic reality.

Moreover, the current business rates system creates perverse incentives for business in terms of where they locate operations and capital investments. It presents a significant and growing upfront cost for many companies, particularly in London, which needs to be addressed for them to invest more in training, recruitment and capital, and increase productivity levels across the economy.

Pressure

LCCI has also recommended that the impact of office-to-residential permitted development rights (PDRs) in London should be considered to identify the ways in which essential office and commercial space can be safeguarded. While the capital undoubtedly needs more residential properties, these should not come at the expense of commercial spaces that are critical to its growth. There is evidence that PDRs are already causing pressure on London’s business space. For example, the Mayor reported local planning authorities lost 1.7 million square metres of office space at the expense of residential units between 2008 and 2016. This will ultimately impact on the cost of office space.

Especially in areas that are of strategic importance to the London economy, including the central activities zone, it is vital that the impact of these conversions is addressed, and that they are exempted from PDRs beyond the 2019 exceptions. Beyond office space, evidence has shown there is strong demand for industrial space in the capital. The aspiration of “no net loss of industrial floorspace capacity” in the draft London Plan is welcome but it does not go far enough given the loss of such space in the capital in the recent past. Ultimately, there is a balance to be struck to ensure that housing supply issues in London are addressed at the same time as giving businesses the space to grow, expand and create more jobs.

Post-Brexit London

With businesses already facing considerable cost pressures due to the introduction of the apprenticeship levy and immigration skills charge – as well as the uncertainty around Brexit – the government, working in concert with the Mayor, should alleviate concerns over business space as a first step in creating a post-Brexit London where businesses can continue to thrive. Addressing the flaws in the business rates system as well as the negative impacts of PDRs must play an important role in addressing this.

Polling data are based on a ComRes survey for LCCI of 505 business decision makers, representative of all London businesses by size and broad industry sector, May-June 2018.

Joe Richardson, Policy Research Officer, LCCI

Read September’s issue of London Business Matters for more on this topic.

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