Commercial property landlords are under intense pressure to help tenants struggling during the coronavirus crisis.
Temporary store closures have swept across Europe, mandated by national governments. In the UK, prime minister Boris Johnson has told the public to avoid “pubs, clubs, theatres and other such social venues”, although the government has so far stopped short of enforcing closures.
Footfall on the high street plummeted by close to a third on 15 March compared with the same day last year, according to the latest data from Springboard. Shopping centre visitor numbers fell by a fifth, while retail park footfall dropped by about 7%.
Among the retail giants closing stores for the next two weeks are Nike, which has shut all shops outside of the Asia-Pacific market, and Apple, which has closed all stores outside of China. Selfridges has followed suit, having provisionally shut its stores in London and Manchester.
A growing list of leisure operators temporarily shutting outlets includes Corbin & King – owner of The Wolseley, Delaunay, and Brasserie Zedel – and cinema chains Everyman, Odeon, Cineworld and Picturehouse.
The effects are already being felt among other occupiers. Troubled retailer Laura Ashley is preparing to appoint administrators as a result of the outbreak, putting around 150 stores at risk of closure.
Retailers including Debenhams and H&M are calling for extended rent-free holidays to help mitigate the impact of dwindling visitor numbers.
All these factors are piling yet more pressure on retail and leisure landlords in the UK, many of whom were already feeling the strain from tenant insolvencies, closures and rent cuts – particularly those landlords with their own balance sheet issues.
Race to reassure
A drop in demand, created by social distancing, has resulted in a sharpened focus from investors on company balance sheets.
Paris-based landlord Unibail-Rodamco-Westfield – which has provisionally closed all “non-essential” shops in France, Spain, Poland, Austria, the Czech Republic and Slovakia – stressed it could access “undrawn credit facilities to manage its liquidity needs” in its latest market update.
Paris-headquartered rival Klépierre also vowed to reduce “non-essential capital expenditures and non-staff operating expenses”, and reaffirmed it has “sufficient committed revolving credit facilities to cover its liquidity needs”.
Some landlords are offering rent relief to their occupiers. Eurocommercial Properties is granting “a number” of rent payment deferrals for its tenants in Italy for the second quarter, switching to monthly payments rather than quarterly in advance.
But whether the UK’s major retail-focused landlords can afford to help their tenants out in a similar fashion remains in doubt, particularly as some are suffering from their own cash-flow problems.
Rob Virdee, an analyst at Green Street Advisors, says: “I am fearful for the UK’s landlords. This could be the straw that breaks the camel’s back.
“UK retail landlords like intu are already in a precarious spot and are unlikely to allow tenants concessions such as deferred rental payments.
“The problem with [landlords such as] intu so far has primarily been a balance sheet one; Covid-19 could turn it into an operating one.”
A £330bn lifeline
The government has frozen business rates for all retail, leisure and hospitality firms for a year as part of a package of new financial measures. The move has been broadly welcomed by real estate.
This followed heavy criticism from the hospitality sector on government recommendations that people avoid pubs, clubs, restaurants and bars, without offering support for the businesses affected.
Chancellor Rishi Sunak also unveiled a bail-out package in the form of £330bn of guaranteed business loans. This represents 15% of GDP.
This will be available for any business that needs access to cash to pay rent, salaries, suppliers or purchase stock.
Sunak added that from next week, to support liquidity at larger firms, a new lending facility has been agreed with the Governor of the Bank of England to “provide low-cost, easily accessible commercial paper”.
Will this be enough to stem the tide? Occupiers such as Revolution Bars Group, which has 74 bars, has said the government’s new rates relief measures are welcome but “do not go nearly far enough”.
Patrick Plant, a real estate partner at Linklaters, says: “I think you’ll find that this may provide less relief for landlords than might have been intended. I’m not sure it’s going to be the panacea at all.”
Plant says that since what the government is offering are essentially loans, tenants that were struggling pre-coronavirus may not want to add to their debt piles.
“It doesn’t necessarily incentivise tenants to remain in situ, to carry on paying their rent and everything else,” says Plant. “That’s the tricky dilemma. We all know that a lot of these retail tenants were in any event looking to reschedule their rental liabilities with landlords.”
Plant also questions why the government should ultimately feel responsible for “propping up some businesses which have passed their sell-by date”.
“Even before this virus, retail has been going through a state of massive change,” Plant adds.
“There are new retailers coming along, dynamic businesses coming up with new ideas. We now need to look to those retailers of the future. We need to support and try to preserve what we can of our existing retail tenants, but to be realistic.
“If this [situation] quickens the pace of change, then that may well be an outcome that we’re just going to have to come to terms with.”
Banks must step up
The market is broadly stymied on the far-reaching implications of Covid-19 on retail property – from how rating authorities will act, to how service charges will be paid.
One senior agent says the issue is so complex that he does not know “what to think”, adding: “It’s so deep – where does it end? Airlines, train companies, cinemas, restaurants, normal shops, betting shops, hairdressers, banks – everyone.
“The government can’t bail everyone out, and the world can’t simply stop spinning for three months.”
A retail property investor adds that the market outlook is changing at a “dramatic” pace. “It’s hard to know where it all ends and where the implications are,” he adds. “It is almost impossible to speculate; it could all end up sounding very apocalyptic.”
Perhaps the onus is on the lenders to be more flexible in accommodating landlords. The wider assumption is there will be some type of amnesty offered on debt repayments for businesses with significant debt piles, which could manifest through repayment scheduling.
RBS, Barclays and Lloyds Banking Group are among those offering relief packages to small and medium-sized businesses. However, there is an argument for extending these to larger customers.
“Everyone has to pull together,” says Green Street Advisors’ Virdee. “The socially responsible thing would be for banks to say: ‘We have the liquidity’, [partly] because all the central banks have backstopped them.
“Therefore, this should not be a situation where banks are not lending; however, are they going to ask for some equity injections to mitigate their risk? Most probably. That’s where it becomes problematic… for highly levered companies.”
Light at the end of the tunnel
The months ahead look bleak for retail and leisure property, but there is hope yet. Countries such as China and Singapore, hit early with the coronavirus crisis, are beginning to resume business as usual.
In China, retail giants are largely back up and running. Starbucks has reopened 85% of its stores in recent weeks, while Apple’s 42 stores in the country have opened their doors.
Paul Souber, co-head of retail at Colliers International, says 40% of retailers in China expect to see a recovery in the second quarter of this year, citing a survey conducted in February.
There was an estimated 80% drop in year-on-year footfall among food and beverage outlets; 60% of respondents suspended all business activity. Many pointed to the importance of co-operating with landlords to create an online strategy.
Key learnings from China’s experiences included the need for retailers and shopping centre operators to work together to expand online footprint. Notably, from an overall market investment point of view, data centres emerged as the big winners during the period.
Increased sanitary control measures will now become the norm for landlords in China. To aid short-term recovery, 40% of occupiers will launch new products, services, formats and concept stores to boost performance post-crisis.
Souber adds: “What we can take from this is, it started for China in December. Once the severity of it was realised, the government was very quick to act. Three months later, they seem to be coming out of the end of it. We just have to hope it’s the same for us.”
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