Coronavirus: the effect on the Commercial Property Sector
- AuthorPaul Engelbrecht
The Covid-19 pandemic has had a profound impact on the commercial property sector and there is now close scrutiny as to how the market will cope. Paul Engelbrecht at Hughes Paddison Solicitors has given his predictions for what life after lockdown in the commercial property sector will look like:
Some Tenants will struggle and some may not make it. Debenhams, Oasis, Warehouse and Carluccio’s have all entered administration. These are businesses which were, reportedly, already struggling, but circumstances have tipped them over the edge. Sadly, more may follow.
Some Tenants in certain sectors are doing extremely well and may look to use this as an opportunity to expand into other areas that they have been eyeing for some time.
Some Landlords may not cope either. Landlords are not immune from the current climate and those that are heavily leveraged will find times increasingly difficult, particularly if there are rent arrears and running costs mounting. Landlords also need to be aware that they do not breach lending covenants either. Whilst they are encouraged to work with their Tenants to find a resolution to the difficulties with cashflow, they themselves may be pressed, and if they do try and pursue Tenants for full recovery of arrears, this may cause a domino effect.
The retail sector is particularly vulnerable and owners of some prime shopping centres will be particularly exposed, as there were indications of pressure on the retail sector in 2019 already, where empty properties were already been seen on the high street.
The real estate sector is going to have to work together. There is undoubtedly going to be an easing of the restrictions and when that happens, land owners, occupiers and funders will all have to collaborate to try and leverage through this, particularly as there will be much higher debt levels than there were prior to lockdown. Tenants are not going to suddenly have cash to pay arrears and Landlords are not going to suddenly have cash to pay their funders. All stakeholders are going to need to work together for the benefit of each other to overcome this and ensure that a positive outcome is achieved. If one party starts to look at its own interest above the other, then the relationship will quickly break down and nobody will win in that situation.
Substantial debt relief may be considered. Some Landlords are giving some rent free periods. Many are offering deferrals and others have yet to commit. If recovery is slow, then simply deferring arrears, even over a year or more, may be unaffordable for some Tenants. This could have disastrous effects on Landlords and in turn funders. Some form of debt relief for the sector will need to be obtained.
Business Rates relief and other reliefs are welcome. Business rates have already been under much pressure and scrutiny in the Press, particularly with occupiers crying out for reform. The relief being offered to some occupiers is welcome, although many will not benefit from it and some say it is too late already. Rates have put an additional pressure on all business tenancies. There is going to be a change in the landscape on Rates and it is doubtful whether this will return to “normal”, or whether this will be a catalyst for a wholesale reform on Business Rates.
The Recovery? It is hopeful that there will be a swift “bounce back” after restrictions are lifted, however, that is not clear, as some levels of restriction are likely to be in place for a long time, particularly for restaurants and pubs. The loss of revenue is not going to be topped up and there will a slow and steady increase in revenue sales once the reopening of shops and businesses takes place, but it is very clear that there is going to be a gap in revenue income for the majority of businesses over the next financial year and possibly longer. It is also a big question whether consumers and people will return to their old habits and may be more watchful of their money and how it is spent.
Tenants will have the final say. Historically, Landlords have always been aggressive in renegotiations on leases, renewals and other commercial aspects in the real estate sector. They will now have to take a view and Tenants will have the pick of available space. If Landlords want to minimise any voids, then they will need to take into account the fact that retailers will be looking to reduce their costs and have a renewed position of strength in their negotiations. Blue chip Tenants and big names will be more aggressive towards their Landlords, or they will simply walk away, using any processes available to them, particularly when there is likely to be a plethora of opportunity and space available.
A change in the Retail Market Towards the end of 2019, there was some speculation that serviced offices had reached its peak. The current situation may in fact reignite that industry. Flexibility for serviced offices may become more attractive to business to keep cashflow levels and commitments low. Further, the retail and high street sector is likely to change and planners will become increasingly important in that it is perceived that there will be a mixture of retail, leisure, education and office use on the high street to increase the occupancy rates and also to increase footfall which has been diminishing whilst big employers vacate city centres to work in less attractive and lower cost business parks.
The attitude of mortgage providers will be under pressure. With one in nine mortgages being put on a mortgage holiday, there will be significant pressure applied to mortgage lenders not to seek recovery of arrears too swiftly. If repossessions and enforcements are taken by lenders, then they need to be sure that there is an investment market behind them, otherwise it is likely to take a long time to recover from that. There is no point in pulling products. Consumers need confidence in the Banks and they will need to work with Landlords and occupiers and offer them greater assistance in these times.
Opportunities will be Abundant. Some have said that it will be like the “Wild West” .There is no doubt that voids will increase over the next twelve months and some prime sites will become available, either for occupational Tenants or potential redevelopment. Developers and investors with cash reserves and working capital will be well placed to sniff out opportunities in the upcoming market. Current deals being agreed under lockdown are still at market levels of rent which is encouraging.
An Opportunity for Town Centres. With the high street under pressure, town centres need to remain attractive and they need to work with the community and accommodate development opportunities to enhance their offering. Town Planners and Central Government need to consider how they can make real and meaningful changes and get involved, to provide opportunities, funding and resources. Planning Departments will need to be open minded and Permitted Development Orders will also need to be considered, to allow flexibility for speedy redevelopment.
Hughes Paddison is well placed with its own advisors, contacts and relationships to offer assistance to businesses, owners and occupiers in the commercial property and real estate sector during these uncertain times. If you have any queries or concerns regarding your property matters, please do not hesitate to get in touch.
Paul Engelbrecht – Director, Head of Commercial Property
Telephone: 01242 586868 / 07799 481239