The events of the last six weeks are like no other in any sense, let alone the particular impact on real estate. The assault on our nation’s health, freedoms and now economy has been swift and shocking. Everything is so fast moving that whatever is written here will feel out of date in a few hours, let alone at the time of print, but there are some truisms and fundamentals from before COVID 19 that we need to consider to be able to analyse the impact on the property market and how it can recover.
Retailers had suffered a brutal few years on the High Street and were already on their knees prior to COVID 19. Intu (owner of MK’s shopping centre) announced at the end of March that it was about to breach its debt commitments following a collapse in the rents received from its retail tenants. The resulting lockdown may have been the final straw for the struggling landlord and others.
When we do come out of lockdown, query will we hit the High Street, or be more discerning and reduce discretionary spend following the inevitable cuts to most people’s disposable income? Whether the start of the demise of the High Street was as a result of upwards only rent reviews and sky high rents, crippling business rates, or simply a change in shopping habits, the High Street will never be the same again and we will have lost some beloved brands. From experience in my local area there has been a groundswell of support for nimble, independent businesses who switched to ‘house to house’ deliveries or changed their use. Those brands that have adapted and reacted responsibly to this crisis should come out stronger if they can survive a further three weeks or longer of lockdown and we are already seeing some retailers re-opening after reconsidering their social distancing measures in warehouses for example.
As with retail, casual dining was struggling before the COVID-19 lockdown but the recent events will certainly speed up the demise of some well-known brands and, sadly, small independents. The buzzing restaurants, theatres, cinemas and sports venues are all eerily closed with no income for at least a further three weeks. Given the pub/bar industry famously operates with only a few weeks’ working capital, again, we will inevitably see a continuing adverse impact here and as lockdown release will likely be phased sites cannot all re-open at once. An All-Party Parliamentary Group for Hospitality and Tourism has been launched to start an urgent inquiry to establish the best ways to support the recovery of businesses hit by coronavirus – at the right time and in line with government health advice and is due to report mid May.
Shoosmiths has been inundated with requests for advice from our occupier clients concerned that if their premises were closed, could they terminate their lease. Some could simply not afford to pay their rents if they were not open to trade. This creates a chain reaction through the industry. If tenants do not pay rents, then landlords have a void in their rental income. The government’s coronavirus business assistance included a moratorium on a landlord seeking to forfeit a lease for non-payment of rent. This is helpful for tenants but it’s important to note that what has been announced is not a rental deferment or rental holiday. Rent and other lease payments are still payable on the due date with interest accruing due to late payment (where provided for in the lease). Some landlords are actively looking to circumvent the spirit of the moratorium as there are no restrictions in the legislation on landlords using other remedies available to them for non-payment such as proceedings to recover rent under CRAR or enforcing orders for the payment of rent and other payments (although this may be more time consuming). Finally, once the period ends the landlord regains the right of re-entry or forfeiture for non-payment during the moratorium unless they’ve expressly waived their rights to do so – meaning that if the tenant isn’t able to pay the outstanding rent immediately the landlord could forfeit the lease.
The government sought to plug landlords’ income gaps by announcing that they could have mortgage holidays but as we know commercial property investors do not always have bank debt so we are going to see Institutional Investors suffering reduced income too.
What about the previously booming local housing market? Many of MK’s numerous new housing estates are likely to stand empty with construction halted. The government guidance is that homes can only be sold where they are vacant. This means that buyers without a chain may be able to proceed but otherwise this prevents completions going ahead. Initially we saw huge number of contractors leave sites interpreting the government guidance to the letter and, in hindsight, too strictly. Figures suggest 25% of construction sites are suspended. Now, with new social distancing guidelines from the government and some key suppliers being forced to re-open their doors, some are heading back to keep building. This is crucial to the wider recovery as the construction industry employs three million people] and is the bellwether for our economic prosperity. Last week we hosted what we call a ‘Shared & Halved’ webinar for our housebuilder clients. Stewart Baseley, Chairman of the House Builders Federation joined the Shoosmiths panel to discuss the impact of COVID 19 and answer questions. It was clear that funding and financing was felt to be the biggest issue facing the house building industry. There is some talk of the Help to Buy scheme being extended beyond the April 2021 cut off, and other stimuli such as SDLT cuts, VAT reduction etc will no doubt come into play as well as incentives on the banks to extend credit.
Can we see the hoped for V shaped recovery is the big question? Struggling business owners with good track records before the crisis have been queueing up (virtually) for the government backed loan schemes through the Coronavirus Business Interruption Loans (CBILs) and Coronavirus Large Business Interruption Loans (CLBILs) but we hear that far too few have actually been granted, despite a reported 61,000 applications per day. Many will also take advantage of VAT deferment and furloughing to preserve cash. All businesses will need there to be a significant bounce-back, encouraging this and wishing for this is one thing, but also appropriate and timely further state interventions.
Turning to look at those property transactions in the early stages, developers who were securing planning and trying to deliver schemes can take comfort in some encouraging news: planners have adapted to working remotely well; hosting committee meetings by webcalls. It was also reported that last month saw a record number of planning approvals, boosting the pipeline for the recovery phase. We do expect to see some legislative relief in respect of lapsed permissions and missed milestones so watch this space.
As we all tentatively look forward to a life after lockdown we must keep talking, sharing ideas, perhaps agreeing sensible COVID 19 provisions (accepted by developers and tenants alike in some of my current deals), agreeing interim repayment plans for rent arrears during the lockdown rather than more draconian measures.
What is clear with this crisis is that the disease and the cure affects us all indiscriminately and taking inspiration by so much good that has been done in communities by working together and being innovative even in our darkest times, we can start the recovery for our industry.
For more information visit www.shoosmiths.co.uk