Landlords: Don’t Bank On Collecting Any Rent Before Next Spring
Today, the UK’s property owners will ask their tenants to pay their quarterly rent. A big slug of them, especially in retail, will be told no. And they may well go on hearing no from tenants until well into next spring.
Tuesday 29 September 2020 will be a rent quarter day like no other for UK commercial property. Rent collection in June was not nearly as bad as had been feared, but a rising second wave of the coronavirus, combined with a variety of government legislation, has both landlords and tenants fearing for the future as the leaves fall from the trees.
A government moratorium on landlords being able to evict tenants or use the court system to pursue unpaid rent was earlier this month extended from the end of September to the end of December. And some in the sector believe this change to the UK legal system is likely to persist for longer still.
“I think the moratorium will definitely be extended to 31 March, and one institutional landlord I’ve spoken to recently thinks it will run until at least 30 September 2021,” RSM partner Damian Webb told Bisnow.
He argued the government is unlikely to lift the moratorium on rent collection at the next quarter day at the end of December, as the post-Christmas period is when retail and leisure tenants are at their most precarious.
A poor Christmas season, a strong possibility amid continued lockdowns, would leave tenants particularly vulnerable to suddenly having rent payments demanded of them.
“The government won’t want to get the blame for a swathe of closures and redundancies," Webb added.
For those in the property industry, the government moratorium has fundamentally warped the relationship between landlords and tenants, and been a hindrance rather than a help for the two sides renegotiating leases that have become unaffordable as a result of coronavirus-impacted trading.
Industry bodies like the British Property Federation and retailer association the British Retail Consortium argue that most landlords and tenants are finding difficult-but-amicable solutions, such as rent deferments or payment holidays, to ensure that tenants can keep trading in tough times.
But not everyone is playing ball. The retail industry said up to a third of landlords are refusing to engage with tenants to try and restructure leases, a survey from the BRC found. The property industry points to large, well-capitalised retailers like Boots, Superdrug, JD Sports and Apple that have refused to pay rent or have demanded cuts even when they have either stayed open throughout lockdowns, or continued to trade well.
“A lot of the bigger tenants aren’t engaging, and aren’t budging. It’s not the smaller ones so much as the big ones,” Ellandi Associate Director of Asset Management Richard Hutchison said.
What is becoming clear from data being collected is that landlords are missing out on large amounts of rent. Cass Business School and the BPF estimate landlords have forgone £4.5B of rent since the beginning of March. The BPF said a big chunk of that is owed to pension funds and insurance companies that use it to pay the nation’s pensions.
Commercial property is owed a collective rent bill of £2.7B today, the BPF estimates, and Cass, which produces an authoritative annual report on UK commercial real estate debt, estimates the sector faces a quarterly rent bill of £1.5B.
In June, landlords collected only 68% of the rent they were due, according to data from property management software company Re-Leased. That equates to about £1.9B in rental income. The sector is still bringing in enough rent to meet its interest obligations, but not by much, especially once other costs are factored in.
And this 68% figure is an industry-wide average that hides a lot of nuance. While industrial owners collected 75% of their rent, for retail owners the figure was only 60%.
“Pretty much every borrower that owns retail assets is in some sort of covenant breach,” Webb said. “Banks are offering payment holidays, and being realistic. But the banks will be selling this debt to new investors at a discount via the back door and trading out of their positions.”
In some ways, Re-Leased’s data provides some comfort for landlords. There was an expectation that rent collection at the end of June would be significantly worse than in March, given many tenants were forced to shut their doors due to lockdown regulations during the quarter. But Re-Leased data showed rent collection actually improved by one percentage point in June compared to March.
“You saw a lot of tenants, if they paid their rent in the first quarter then they paid in the second quarter as well,” Hutchison said. “You’d like to hope that will continue, and from talking to tenants we’ve been given no indication those that have paid won’t continue.”
Worries that the final quarter of the year will see things get worse for tenants in the retail and leisure sector centre on concerns the government’s new advice urging office workers to work from home and a curfew for food and beverage operators will hit trading further.
“People who were opening up stores are now rolling back on that, especially in the grab-and-go sector,” Webb said.
“There are a lot of concerns about Q4,” Ellandi Head of Research and Analytics Isabelle Hease said. “There is a big question mark about when things get back to some sort of normality. A lot of retailers were pinning their hopes on having an extended discount period and getting people back in stores before Christmas. There is the new furlough scheme to contend with. There is so much uncertainty.”
Hease said Ellandi’s mobility analytics showed that consumers were shunning city centres and large shopping centres, favouring local high streets and community shopping centres. Given the advice on working from home, it is a trend likely to continue.
That will benefit the landlords of suburban shops, cafés, pubs and restaurants. But for the retail property industry more broadly, the final quarter, once seen as the best hope of a rebound in 2020, offers little respite.