Research Briefing Note. Property and the national living wage gva.co.uk. April 2016

Transcription

1 Research Briefing Note Property and the national living wage April gva.co.uk

2 2 gva.co.uk Research

3 Research Briefing Note Introduction From the 1st of April 2016, the minimum wage of 6.50 per hour will be replaced by the national living wage. The new 7.20 per hour rate will apply to up to 1 million workers above the age of 25, an increase that is expected to cost businesses as much as 2.6 billion. Of greater significance is the fact that the new hourly rate is set to rise to 9 per hour by April 2020, adding more than 7 billion to the annual costs of businesses over the next four years. Employees under the age of 25 will still be entitled to the minimum wage, which will be set at 6.70 for over 21s and 5.30 for over 18s. Historically, many employees have preferred to pay younger workers the adult hourly rate, with just a third sticking to age related pay rates. Given the scale of increase that many industries are likely to face in wage costs, age related pay policies are likely to become more widespread in order to mitigate the impact. Figure 1 - hourly rates for minimum wage and national living wage Source: HM Treasury 3

4 Research Briefing Note Low paid workers The national living wage is likely to impact significantly on the leisure and hospitality industry because of the number of people likely to be affected. The importance of payroll to the profit and loss in these sectors will directly affect the value of these types of property. The natural conclusion of increased wage costs is that either a reduction in head count or an improvement in efficiencies elsewhere will need to occur in order for the business to maintain the same margin, thereby placing more burden on the industry. The new legislation is set to have a major impact on occupiers with a high number of low paid employees, with further implications for landlords and investors. Bilfinger GVA estimate that the total number of employees who currently earn less than the new national living wage hourly payment of 7.20 per hour is approximately 2.5 million, or 10% of all employees. A further five million employees earn less than 9 per hour on current estimates, equivalent to 30% of all employees. Looking ahead to April s increase, of those currently paid less than the new national living wage hourly rate, 91% are employed in retail, automotive, leisure, hotel and healthcare related industries. As Figure 2 shows, approximately 60% of people employed in food and drink earn less than the new hourly rate (600,000 people), with 40% in both hotels and retail (895,600 and 116,000 people respectively). While not all of these employees may be entitled to the new hourly rates set by the national living wage, these figures highlight the predominance of low paid workers within these sectors and act as an indicator for where the new wage rates are likely to have the greatest impact. Figure 2 - proportion of workforce below national living wage thresholds The legislation will also be regionally prejudiced many London workers in the leisure industry are already paid higher salaries and so it will bring with it a disproportionate burden on the regions. Gavin Brent, Senior Director Source: Bilfinger GVA using ASHE 4 gva.co.uk Research

5 Property and the national living wage Over 25s Workers over 25 who currently earn less than the proposed 7.20 per hour will see their wages increase to varying degrees from the 1st of April. Across all these sectors, the average increase is 6.4%, although this is noticeably higher for hotels and food and drink. For employees on the lowest wages in each sector, the maximum potential increase they are likely to receive is even higher, with most receiving a rise of at least 10% or more (Figure 3). Once the new national living wage is introduced, these employees are then set to benefit from a 20% increase over the next four years as the hourly rates increases up to 9 per hour in April This means that a 25 year old employee in the food and drink sector, currently paid the lowest percentile will get a 44% pay rise over this period. With over 75% of the hotel and healthcare workforce aged over 25, the impact of this will be widely felt (Figure 4). Figure 3 - hourly wage increase for lowest paid Source: Bilfinger GVA using ASHE Figure year olds by industry 2014 Source: ONS 5

6 Research Briefing Note Cost to business The independent healthcare sector finds recruitment and retention a significant issue and higher pay may make the sector a more attractive place to work. In that regard the national living wage should be welcomed. However, the entire sector is under considerable pressure to contain costs and the impact will have to be balanced with price rises if the implementation is to be absorbed. The overall cost to businesses paying for these wage increases is reliant upon a wide range of factors, including the number of employees they have under 25, working hour patterns, overtime and weekend payment policies. They may also look to fundamentally change their employment policy once the national living wage has been introduced with a greater number of zero hour or part time contracts. Bilfinger GVA estimates that the new 7.20 hourly rate will cost as much as 2.1 billion in its first year, of which over 800 million is in the food and drinks sector. Once the new national living wage has been established, the cost of getting the lowest paid wages to 9 per hour is likely to be anywhere from 7-11 billion, with the alternative sectors identified in this report hit by as much as 6 billion. Even on the lowest impact scenario of 55% of the workforce over 25 years old, the additional cost for the retail sector is almost 1 billion on top of the cost incurred to get all qualifying employees to the starting rate of 7.20 per hour. Figure 5- Cost of introducing 7.20 rate We have yet to see any significant move by Government to assist the industry and nothing is expected. The private fee payer market will therefore have to bear the brunt of the increase in cost further subsidising public sector fee rates. Where fee levels are low and the prospect of increases are minimal we expect some short term fallout in the private sector whilst the market tries to adjust. Source: Bilfinger GVA using ASHE Iain Lock, Senior Director 6 gva.co.uk Research

7 Property and the national living wage Summary New national living wage to cost 2.1 billion in first year. 91% of all people affected by new hourly rate employed in retail, healthcare, hotel, leisure and automotive sectors. 800 million cost to food and drink sector to get wages to 7.20 per hour. Over 6% pay increase for lowest paid in April Additional 11 billion cost by 2020 for all businesses. Increased wage burden likely to hit EBITDAR based leases. The economic impact of paying for these wage increases is difficult to predict. Similar warnings prior to the introduction of the minimum wage in April 1999 ultimately failed to materialise. But since then there has been a fundamental change in the retail, leisure and hotel sectors, with a much larger range of choice and greater competition, particularly from low cost or online models. Businesses are under increased pressure to contain costs and profit margins, while rents and other occupational costs such as business rates are much higher than seventeen years ago. The newly announced increased threshold for small business relief will help to alleviate some pressure, but occupiers in the independent healthcare sector and others reliant upon a reducing amount of public funding will certainly come under greater strain. An obvious outlet for business would be to increase prices and daily rates to compensate for the increase in wages, but with concerns over the global economic outlook and some retail markets still struggling following the recession, this is not so straight forward. There is also the issue of addressing pay rates and wage structures with existing employees already above the living wage threshold who themselves may need further pay increases to maintain the differential between pay bands. The need to maximise revenue while maintaining product quality will be the main challenge for all the businesses heavily affected by the introduction of the national living wage. The heavy reliance upon EBITDAR to determine rent in many of the sectors where the national living wage will have the greatest impact means that businesses who struggle with this increase will also face greater pressure on their ability to pay rent. The strength of existing lease covenants may need to be reassessed in the short term, although it may well be that the biggest impact of the national living wage is more social than economic. 7

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9 For more information please contact: Gavin Brent, Managing Director Retail, Hotels and Leisure Richard Gaunt, Director Iain Lock, Head of Health James Kingdom, Research

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