Budget Bites: How New Business Rates Changes Could Add 2% to Commercial Property Costs

The Autumn Budget 2025 has just landed and, for owners and investors in larger commercial property, it feels more like a sting than a sweetener. Chancellor Rachel Reeves has confirmed a major restructuring of business rates from April 2026: permanently lower multipliers for hundreds of thousands of smaller retail, hospitality and leisure properties, funded by a new higher “high-value” multiplier on properties with a rateable value over £500,000.

Crucially, large retail and supermarkets are included in the top band – a Treasury U-turn that overturned months of lobbying and briefings that suggested they would be spared. The Financial Times reported only days before the Budget that the Chancellor was set to bring large retail premises into the highest band, and the final statement confirmed exactly that.

The net result? A significant tax shift from smaller high-street units to bigger stores, distribution warehouses, large offices and regional shopping centres. Industry estimates suggest the changes could add the equivalent of up to 2% or more to total occupancy costs on affected assets once the higher multiplier and the 2026 revaluation bite together.

A tough market gets tougher

The latest RICS UK Commercial Property Monitor (Q3 2025) paints a subdued picture: macro pressures are now visibly weakening both investor and occupier demand at headline level, with only pockets of resilience (mainly prime industrial and central London offices). All-property prime yields are holding around the 7% mark – a level that already reflects caution – and secondary yields remain stubbornly wide.

Add a new layer of tax cost on larger assets and the risk is clear: downward pressure on capital values, slower rental growth, and even softer yields in rate-sensitive sectors.

Construction data is not helping either. While overall UK output scraped marginal growth in Q3, private commercial workloads in several sub-sectors fell sharply, with some surveys recording declines of around 8% quarter-on-quarter. New supply is therefore drying up just as occupational costs are rising – a classic recipe for vacancy risk in secondary and tertiary locations.

Who gets hit hardest?

1. Big-box retail & supermarkets Many supermarket portfolios with superstores or dominant regional centres will see rates bills jump 10-20%+ from 2026, depending on the final multiplier level. Tenants will push hard for rent reductions or break options.

2. Regional shopping centres Anchor tenants facing the higher multiplier are already re-negotiating downwards or handing back space. Landlords can expect shorter leases, higher incentives and slower rent review uplifts.

3. Large distribution warehouses The “warehouse giants” Reeves specifically called out will carry much of the funding burden. Occupiers with national logistics portfolios may accelerate consolidation into fewer, larger (and now far more expensive) buildings, or simply push costs back onto landlords via turnover rents or surrender premiums.

4. Secondary offices & high-street shops in larger units Any property over £500k RV – including many 1990s/2000s office buildings or larger high-street units now let to nationals – gets caught. The combination of higher rates and weak occupational demand is toxic for value.

How investors can fight back – yield-optimisation strategies that still work

1. Aggressive asset management on existing stock Now is the moment to push lease re-gears: offer capex in exchange for longer terms, removal of breaks and upward-only rent reviews. A 5-10 year lease extension can more than offset a rates increase.

2. Reposition or recycle capital Large retail or tired office assets facing the highest multiplier are prime candidates for alternative-use conversion (residential, last-mile, life-sciences, student, hotel). Permitted development rights and local authority eagerness for housing make this more viable than ever.

3. ESG & energy upgrades = rates mitigation + rent premium Improving EPC ratings not only attracts better covenants but can qualify assets for potential future reliefs and definitely commands higher rents. The yield compression on a refurbished, green stock is currently 100-150 bps versus tired secondary – worth having.

4. Look for “priced-in” buying opportunities The market will over-react. Assets where the rates increase is already reflected in pricing (distressed regional centres, over-rented warehouses coming out of lease events) can offer sharp entry yields of 8-10% with strong repositioning angles.

5. Debt & structuring solutions Forward-fund development or refurbishment via JV structures or propcos to spread the rates burden. Some lenders are now offering green improvement loans at sub-4% pricing – the arbitrage is attractive.

The bottom line

The 2025 Budget has made size the enemy in commercial property tax. Smaller units get a helping hand; larger ones pick up the bill. In a market where demand is already weakening and yields sit at 7%, the new higher multiplier risks pushing secondary and tertiary large-format assets into value-decline territory.

Yet every tax shift creates winners as well as losers. Investors who move quickly to reposition, re-gear or recycle capital into resilient or alternative-use stock will be the ones who turn this budget “bite” into long-term outperformance.

The next 12–18 months will be about execution. Those who act decisively will come out ahead.