Thursday, 24 June 2010

It's simpler than that

Lola left a comment on Vince Cable flushes reputation down toilet:

I long ago sussed Cable as a plonker - as I now think have the Libdems.

Question. Local market town... has thriving high street with plenty of good quality good value competing shops, plus moderate sized Co-op supermarket. Tesco want to build a superstore off the high street. This is blatant category killing, but that's OK as it's competition.

Anyway, suppose we had LVT. As Tesco's killed off the smaller businesses the shop values would plummet and LVT would reduce markedly as would the rents chargeable. At the same time the LVT on Tescos site would rocket. The effect of this would be to put up Tescos costs by a significant amount so that they'd have to increase their prices. At the same time the other effect would be to wildly reduce the major costs (rent and LVT) of the small shops enabling them to cut their prices.

LVT therefore levels the playing field between Tescos financial muscle and the local small businesses and benefits free markets and competition. Or have I missed something?

WFW added: "MW, Lola makes a good point, or have we both missed something?"

It's even simpler than that.

If, subject to local democratic control (ha!) Tesco are allowed to open a supermarket, that might or might not make life more difficult for other shops in the area. I have observed that what happens in real life is that greengrocers, butchers etc tend to close but then other businesses which don't compete with Tesco, but complement it (like cafés, dry cleaners, beauty salons, estate agents etc etc) open up, but let's go with L's scenario. Remember that commercial premises are already subject to something quite similar to Land Value Tax, namely Business Rates.

If (big IF) the other shops in the area become less desirable as business premises, then in a rational world local landlords would drop their rents to reflect the lower profits that shops can now make, and there would still be no vacant premises; Business Rates would fall as well, of course. This doesn't work as well as it should for various reasons:

1. Business Rates include the rental value of the building as well as the location (so Business Rates will never be £nil), unlike Land Value Tax, which would (ideally) be close to one hundred per cent of the location value and ignore the buildings value (so in some areas it might well be £nil). So under LVT, the owner of the building would be compensated in full if the location becomes less desirable through no fault of his own (the location rental value and his LVT bill go down £1 for £1).

2. Business Rates have all sorts of fiddly exemptions and discounts for vacant and derelict premises and undeveloped sites, so landlords are encouraged to leave premises vacant (or sites undeveloped) rather than to drop the rents and get the premises occupied. Under LVT there'd be no such exemptions, so landlords would be much more keen to get new tenants in. Don't forget that shops that stand vacant for long are a drag on the whole High Street, and once more than a certain number are vacant the whole High Street goes into a death spiral.

3. A cut in Business Rates is not much consolation to a shop-owner who is locked into high rents that cannot be negotiated downwards; or who bought the shop with a big mortgage before Tesco moved in. With LVT, there would be full relief is an area became less desirable, and it would depress property prices to their bricks and mortar rebuild costs, so the mortgage would be much smaller to start off with.

4. If LVT were levied on a per-square-yard basis, Tesco would be paying the same LVT on ten car parking spaces as a traditional Victorian single-fronted three storey shop building round the corner (quite different to Business Rates, of course), which would level up the playing field no end. It's up to the council to agree with Tesco whether people visiting other shops are allowed to use Tesco's car park.

As a footnote, we do not need to distinguish between "location rent" and "LVT", they are the same thing and cannot be added to each other or 'passed on' as higher prices to charged to customers. Rather the reverse is true - the location value depends on how suitable it is for running a business from, but prices for groceries are fairly fixed (they are pretty much the same across the UK, from the poorest to the poshest areas).

Similarly, the prices that Primark charges for an item of clothing is the same on Oxford Street, London as on High Street, Anytown (but as it can sell ten times as many items per square yard on Oxford Street, it pays ten times as much rent per square yard there as in Anytown).

So in fact, part of the prices that Tesco charge is being 'passed on' in the other direction to the landlord (which may well be Tesco itself, of course). It is this part of the cash-flow that LVT would capture. So the common notion that 'businesses struggle to pay the rent' is not actually true - what they are struggling to do is to generate as much profit as another business could by trading from that location - the landlord just plays them off one against the other (and he'd be stupid not to).


Lola said...

In other words LVT captures the windfall profits (or losses) enjoyed by landlords. So under LVT Tescos would pay more as they make bigger profits, which notionally get passed onto their landord, which could be themselves. Tescos are likely to be more 'efficient' than the local shops, probaly from economies of scale, so there would / could still be pricing differences, but these may be more related to service and quality under LVT. And LVT would increase the efficiency of the property market, assuming that there were competing landlords (not necessarily the case of course). Of course Tescos could buy up the whole High Street, I suppose.

What I am trying to establish is whether LVT aides competition in cases like Hadleigh where Tescos lear intention is to category kill. It cannot grow its business by generating real new customers, it can only generate 'new' customers by taking them away from existing smaller businesses which it can out-compete, not least on price. I have a feeling that Tescos pays less rent/rates in proportion than a smaller business does. It's far less sensitive to rent/rates. So, whilst I am happy for Tescos to compete on its products and services with anyone it seems 'unfair' for them to enjoy additional margin from the rent widfall, which they benefit from under the current system. And it seems like LVT/rent would capture this 'excess' for all - if you see what I mean.

Mark Wadsworth said...

L, yup, fair summary. Tesco is in fact two separate divisions - a hyper efficient retail division (no prob's there); and a ruthless property owning division that gets up to all sorts of skullduggery behing the scenes in terms of gaming the planning system that would make your hair stand on end.

The key to this is that Tesco often buy up derelict sites and leave them that way for years (to kill off the competition). If those sites were liable to full LVT, then they'd either get their new store built much more quickly or not buy the site in the first place.

Lola said...

MW. I know about Tescos skulldiggery. IMHO they are a very efficient retailer with a hobby - a rent seeking property company. You wait. One day they'll spin out the property component, rather like Burton's did/was forced to do.

Lola said...

...and when the next anti-tescos meeting takes place in hadleigh I might just go there and throw in my large spanner. Won't do any good of course, but drip, drip, drip.......

Lola said...

Totally off topic but just got this gem:

"As promised I attach a link to two sources of funding which may be of interest to you.

The funding is available for leadership and management skills development which covers a wide range of “training “ from one to one coaching, in house bespoke training, and external courses.

I have utilised both schemes for a number of clients this year for management skills training and/or coaching to improve the efficiency of their organisations.

The Train to Gain scheme offers a free £500, with a supplemental £500 available with matched funding from the client. i.e. total investment £1,500, with client contributing £500, and the Government Taxpayer i.e. us £1,000

The EDDA scheme is a 70% funded grant scheme, to a total value of £5,000 – so £1,500 invested by the client, and the balance of £3,500 paid by way of a grant via East of England Development agency Taxpayer i.e. us.

Gawd help us. They're STILL at it. Spending my bloody tax money on what they think it should be spent on. How about just not bloody taxing me?

neil craig said...

What has been missed is that under a free market the value of a good, in this case the land Tesco use, is based not on its value to Tesco but to what an alternate purchaser would be willing to pay. Thus Tesco's of main street site should not attract higher rates just because Tesco make it busy.

The point about payi8ng rates on the car park is reasonable. If it was brought in I assume Tesco would build multi-level car parks instead, thereby freeing up land for other uses.

Mark Wadsworth said...

NC, good point, but I was alluding to that in my final para.

And having multi-storey car parks is another good idea of course (for the same reason as building flats above).