OREANDA-NEWS. New property valuations released 30 September 2016 as part of the UK's business rate overhaul will put pressure on some commercial property rental values, Fitch Ratings says. They will not affect ratings for UK CMBS transactions because there is limited exposure to properties likely to be affected.

On Friday 30 September, rateable values were reset in the UK, with April 2015 rental values replacing April 2008 as the basis for business rates. In aggregate, UK commercial real estate appears to have ended this period with similar rental values as in 2008. As business rates are intended to be fiscally neutral, in Fitch's analysis the tax rate (multiplier) applied to the rateable value is assumed to be broadly unchanged.

Some properties will have experienced rental growth over this period and are likely to face higher business rates. Higher business rates raise occupier costs and increase the vulnerability of the property to rental value declines (RVDs) once leases are renewed. Therefore, potential stress awaits properties in markets that have reported relatively strong growth in rental values between business rate reset dates. Fitch has compared its UK RVD assumptions with the potential rental shocks that could arise from this change, finding no rating impact.

In Fitch's investment-grade rating scenarios, rental value is permanently stressed so low as to absorb the effect of business rates rising in various markets. This is on the basis that when the rateable value is next readjusted (Fitch assumes rebasing to 2020 rental values), business rates will fall back in such stress scenarios.

Below investment grade, Fitch expects only a small number of markets to be affected by business rates rising enough to warrant higher RVDs. Industrial properties in Cambridge, London, Nottingham and Bristol, offices in Cambridge, Belfast and Scotland, and high street shops in and around London's Oxford Street, Hammersmith and Guildford are susceptible to additional single digit percentage RVDs above our 'Bsf' assumptions.

However, these adjustments (and a smaller number of 'BBsf' adjustments) would have no rating impact on Fitch-rated UK CMBS. Higher quality legacy CMBS, as well as more recent CMBS 2.0 transactions, have little if any exposure to affected markets. Meanwhile, lower quality legacy deals are naturally skewed towards weaker properties that have shed rental value post the 2008 crisis; they are therefore unlikely to be in line for higher business rates.