Commercial property landlords and lenders are facing renewed pressure because of government measures to help struggling tenants as the coronavirus pandemic spreads.
The government move to stop landlords from evicting commercial tenants for three months has provided much-needed breathing space for occupiers, many of whom have been instructed to close in the nationwide lockdown as the coronavirus pandemic spreads.
Under the moratorium, tenants missing a rent payment because of the Covid-19 crisis will not lose their leases. But the difficulty now lies with landlords and the banks, since it is expected to result in a big shortfall in rental income.
“Investors in such property are likely to receive little if any rent based on the mood music to date, or indeed following the government’s recent ‘lock down’,” said Andy Pyle, UK head of real estate at KPMG.
“If rental payments are to be missed, property companies will be under increased pressure to pay interest on their own loans and they may even default.”
Landlords such as intu, which is already supporting occupiers with an 11% reduction in its service charge budget for the full year, is among those feeling the strain.
An intu spokesperson said: “We will continue to do all we can for the brands that rent with us while also ensuring any concessions we make are not to the detriment of our own financial position as we look to address our balance sheet issues.
“As well as welcoming decisive action to help our brand customers, we also hope the government will consider measures to help landlords, many of whom will be severely impacted by the loss of rental income during this period.
“We welcomed the business rates holiday and other measures recently announced by the government but more support is needed.”
A £2.5bn quarterly rent bill
The rent bill due to retail landlords today is estimated to total £2.5bn, according to analysts at the British Property Federation. But hundreds of businesses look set to withhold their quarterly payments. This included chains such as Burger King.
Several REITs are already in cash-saving mode to help tenants, with many reducing their non-essential capital spending. Among these, Shaftesbury has drawn down its credit facility and is temporarily suspending its dividend.
Others are also changing pay packages at the top. To give one example, Hammerson’s directors and non-executives have chosen not to accept rises in base pay from 1 April.
Organisations including the BPF and Revo are in talks with the government on measures to help real estate absorb the impact, including direct financial support for landlords.
Melanie Leech, chief executive of the BPF, told EG: “There is real recognition in the government of what the landlord issues are. There’s an element of putting out one fire and moving on to the next, which we understand to an extent but now we have got to rent day, it is clear rents aren’t being paid. The government moratorium on evictions is being interpreted by some tenants as an instruction not to pay rent regardless of ability to pay.
“I don’t think the government intended for this, nor is it helpful for landlords with their own problems to worry about, to stay within banking covenants and meet liabilities to pensioners. It is something we are picking up with the government this week.”
Government talks
Leech points out that there is a “very strong case” for lenders to provide debt service deferral to owners, as there are 45m savers and pensioners across the country whose money is invested in commercial property.
With landlords and tenants already beginning to discuss the next quarterly rent day in June, the BPF is in talks with the government on co-ordinated action from the government, Bank of England and financial authorities, so that landlords can be more flexible.
For the BPF, this results in two choices: either to inject liquidity into the system so retailers can manage debt without an immediate shock at the end of the next three months; or for the government to underwrite debt for all parts of the chain, from tenants to landlords and lenders.
Revo has joined the BPF in calling for business rates relief for empty buildings, as well as a potential fund for companies to draw down from and deferrals or holidays for commercial mortgage interest rate payments.
“Although mostly non-trading, shopping [destinations] are essentially open given their provision of essential retail, so there is little margin for them to reduce costs,” Revo chief executive Ed Cooke said, adding: “The government is receptive to all ideas and has clearly stated nothing is off the table.”
Preparing for life after coronavirus
While the government seems receptive to short-term interventions, the industry is also calling for more resources to determine how to support real estate once the UK defeats coronavirus.
Cooke said a recovery task force combining various parties, from high-level policymakers and industry leaders to the BoE, will be critical to longer-term planning.
“One suspects town centres and cities will look very different to how they did in January,” he said. “It’s important there is a high-level group of decision-makers to start thinking now about how that future might look like, so that when the health crisis subsides we are in the best position to plan for the longer term.”
Factoring in planning, too, is crucial. Leech said the planning system must not have a backlog that prevents development from being kick-started when the government decides the country is up and running again, and that existing permissions should not lapse.
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