R&D tax rebates could offer relief for commercial property sector

It’s no exaggeration to say the Covid-19 pandemic and its resulting lockdown will leave a lasting legacy across the UK economy. It is certainly having a profound impact on the commercial property sector where changed working practices that were imposed during lockdown are leading many tenants to radically rethink their office requirements going forward.

A survey released at the end of last month by the Royal Institute of Chartered Surveyors (RICS) not only highlighted a massive decline in tenant demand for retail and office space – down by 86% and 79% respectively – but, more worrying for the sector, it reported that 93% of respondents anticipate their businesses will scale back their space requirements over the next two years.

Given these sentiments, it’s not surprising that John Lewis, which is now planning to close 50 stores, has announced it’s now exploring the option of turning its surplus retail space into affordable housing. This innovative decision is no-doubt driven by the growing popularity of  online shopping dramatically accelerated through the lockdown of the last five months.

The plans being considered by John Lewis chime with a recent report by the Social Market Foundation think tank which has called on the Government to turn declining shopping districts into residential hubs. The report claims that the decline of traditional high street shopping, also a longer term trend which has been expedited by Covid-19, is inevitable. Rather than trying to revive these areas, more public resources should be committed to creating ‘new and more beneficial uses’ for town-centre sites, the report argues.

The projected decline in demand for commercial property space coincides with a significant rise in demand for residential property. This year’s BBC Housing Briefing reported that homelessness is now affecting an estimated 140,000 families while more than one million UK households are on council-housing waiting lists. Meanwhile, it reported that the number of 20-34-year-olds still living at home has risen to 27%, an increase of over a million people within that age bracket in the past two decades.

As the commercial property sector faces huge challenges in a post-pandemic world, all of these factors seem to present an opportunity going forward where creativity and innovation will be required. Some projects to build new commercial property assets may need to be reconsidered while existing assets might be better utilised as residential properties, where converting them for this use is possible.

Pressure from groups such as the Social Market Foundation may lead to further government investment in this process, and there are currently a number of innovation-focused projects underway which are examining how to overcome the challenges of converting commercial property for residential use. The positive news for those in both the commercial property and construction sectors, which will be tasked to make this transition happen, is that there are already generous incentives available through both grants and tax incentives to support the additional innovation that will be required.

Similarly, the Home Building Fund can provide smaller loans for “innovative housing solutions.”

Research & Development (R&D) tax relief, introduced by the UK Government in 2000, is one such measure offering innovative companies up to 33p for every pound spent on qualifying research and development activities. In general, projects which will qualify for this rebate are those which look beyond the bounds of current knowledge, where the existing data and design rules do not apply, or those which involve experimenting or prototyping.

Qualifying projects have included those which look at developing new or improved modular construction techniques or the development of enhanced building materials. In some cases this could cover research focused on an ideal substitute of one material for another more appropriate one, such as using concrete made from recycled fly-ash.

Similarly, structural engineering projects aimed at extending the application of existing materials, including one which explored new designs to potentially enable wood buildings to be increased from their current limit of six stories to 20, have also qualified for significant tax rebates through the scheme. Other projects which also qualified for relief under the scheme included those looking at improved energy efficiency, more effective acoustic dampening and insulation.

Furthermore companies investing in these change of use projects may well qualify for capital allowances incentives. In addition there are very generous incentives supporting the treatment and removal of contaminants such as asbestos, providing claimants with up to 150% tax relief. It is vitally important companies considering such project speak with a specialist at the earliest possible opportunity to ensure they maximise the potential tax benefits.

This is reassuring news for the commercial property sector as it faces significant upheaval and may require support to address declining demand. R&D tax relief can play a key role in helping those at the heart of the sector seize the opportunity to convert existing commercial property assets to help overcome housing shortages across the UK.