Commercial Property News April 2020 Compiled by Hayven Property Tax
Commercial property is always a very newsworthy topic. Here is a roundup of the latest news (April 2020) concerning commercial property and investments in the UK. At the time of writing, the official UK death toll connected to coronavirus is fast approaching 13,000, so it is hardly surprising that the virus dominates the news including how COVID-19 Coronavirus is impacting property and rents.
Coronavirus hits commercial real estate in the UK as retailers fall behind on rent
The coronavirus pandemic is hitting U.K. commercial property hard, as retailers close for an indefinite period and shoppers remain locked down at home, reports CNBC.com.
The country’s “bricks and mortar” retail sector has been in a precarious state for most of the last decade as a growing number of people opted to shop online. However, customers that still savoured the in-store experience are now stuck at home, after the U.K. government imposed a nationwide lockdown in late March.
Only grocery stores and pharmacies remain open, meaning that restaurants, pubs and other high street stores are closed, with no customers, and many are struggling to pay their rent.
“We expect London commercial property values to fall sharply in the second quarter. The retail sector, which was already struggling with the structural shift towards online spending, is likely to be hardest hit,” Amy Wood, property economist at Capital Economics, told CNBC last week.
Intu, a real estate investment trust with total assets of £10 billion including retail spaces across the U.K., said it received only 29% of the rent due for the second quarter, ending on March 25. In comparison, the company had received 77% of the payments due the time last year.
Hammerson, another major real estate developer with retail parks in Britain, also warned that by late March it had received only 35% of second-quarter rent from its premium outlets in the U.K.’s biggest cities.
“We have received a variety of requests for rent deferrals, monthly payments, and waivers, which we are reviewing on a case-by-case basis,” Hammerson said last week.
Landsec, a U.K. real estate manager, has noted a “huge shift” in how its buildings are used due to the “rapid spread of CV-19″. The company added that 65% of the rent due on 25 March was paid by 31 March, compared with 96% for the same period last year.
“The situation looks very precarious,” Osmaan Malik, global head of real estate at UBS, told CNBC last week. He added that the future prospects of retail property will very much depend on how long the lockdown lasts.
Government orders to stay at home were introduced on March 23, and although they are due to be reviewed next week there is no end date for the lockdown yet.
However, health experts and government officials have warned that life won’t return to normal overnight. There are expected to be gradual steps towards normalisation, which makes it unclear when shops, bars, cinemas and restaurants will open their doors again.
Struggling retail landlords watch rents dry up in the pandemic
When Debenhams filed for administration last week, it wasn’t just suppliers of its stock, who are owed cash, that felt the pain. There are 22,000 jobs at risk if the retailer cannot be rescued and many of its 142 stores are unlikely to reopen, spelling more trouble for British high streets. And there is also a network of landlords who rely on quarterly rent payments from their shops, reports The Guardian.
The outlook for these landlords was dark enough before the pandemic brought the British economy to its knees. More than 16,000 stores closed last year and the enforced shutdown of cafes, pubs, restaurants and non-essential shops is expected to result in thousands more pulling down the shutters for good.
Since pre-industrial times, landlords and tenants have adhered to a schedule of quarterly rent payments, when annual commercial or agricultural rents were payable in four equal instalments on the “quarter days”, linked to religious festivals.
The most recent payday, the second-quarter payment date of 25 March, was a far from a harmonious occasion, however. London & Associated Properties, which owns the Orchard Square shopping centre in Sheffield, said it had collected about 50% of rent due.
It is not just Debenhams, New Look and Sir Philip Green’s Arcadia group – to name just a few of the retailers in deep trouble – that are seeking help on rent. Vast, profitable businesses such as fast-fashion retailer Primark, sportswear chain JD Sports and Burger King are also refusing to pay their landlords the rent they are due.
One major problem is that the government has now allowed commercial tenants to delay rental payments for three months without fear of eviction. Some landlords are furious that certain tenants have interpreted this as permission not to pay.
Some £2.5bn in retail rents was due at the end of March, according to trade body the British Property Federation (BPF). The property industry, it says, cannot absorb vast losses, because landlords have debts to service.
Melanie Leech, chief executive of the BPF, is calling for government and regulators to work with lenders to help commercial property businesses. “As property owners offer relief to their tenants, there is a very strong case for lenders to provide debt service deferral to owners in return, to protect the 45 million savers and pensioners across the country whose money is invested in commercial property,” Leech said.
Some investors have already been caught up in the property-sector tumult. Investment managers BlackRock and Schroders have both suspended trading in their UK real estate funds, saying it was difficult to obtain an accurate valuation of their assets.
“Landlords” are treated as one group, although they vary enormously: some are private individuals, some are pension funds. And their approach to pursuing rental income varies also.
Property consultancy firm Lorenz Consultancy is currently involved in negotiations between more than 40 hospitality businesses based in London’s West End and their landlords. It says two-thirds of landlords are offering some flexibility. “You’ve got to have transparency between the tenant, landlords and financiers,” said Richard Russell at the consultancy. “The landlords want to protect income through this, but don’t want to be left with vacant units.”
Some of the country’s biggest landlords have offered tenants deferred or lower payments, which Cedrik Lachance, an analyst at the property consultancy Green Street, called a “partnership in pain”. “Landlords who are proactive will get better results over time,” he added.
Property firm British Land, which owns shopping centres including Sheffield’s Meadowhall, has scrapped rent between April and June for smaller tenants, and allowed larger firms to spread rent repayments.
A number of landlords, however, have called for their lawyers and are threatening immediate legal action. Intu, which has a £4.5bn debt pile and is fighting for survival, has already threatened some tenants with a statutory demand – a formal request for payment – if they do not pay.
An Intu spokesperson said: “We are happy to engage with brand customers on a case-by-case basis, but we have neither the desire or financial capacity to bankroll global, well-capitalised brands who have just decided they don’t want to pay their rent.”
A similar warning has been sent by Criterion Capital, which owns London properties including the Criterion Building on Piccadilly Circus, home for almost a century to the Lillywhites sports store, now operated by billionaire Mike Ashley’s Sports Direct chain. Its letter warns that non-payment of rent will lead to a winding-up petition.
“This is a sledgehammer to crack a nut and an entirely inappropriate use of the legal process, which will result in business collapse and administration,” said Kate Nicholls, chief executive of UK Hospitality, which represents the cafe and restaurant business. The trade body has written to the government asking for an extension to the ban on evictions, from three to six months. UK Hospitality wants the measures widened to prevent property owners from issuing winding-up petitions or statutory demands, a protection already introduced in Germany.
Russell at Lorenz also believes an extension is needed, as tenants and landlords are already discussing next quarter’s rent. He warns: “There will be a bloodbath in June if tenants are forced to pay double rent: lots could go to the wall.”
Real estate valuations impacted by COVID-19
Capital values fell by -3.0% across all UK commercial property in March 2020, according to the latest CBRE Monthly Index and reported by East Midlands Business Link.
This was almost entirely driven by a 14bps rise in yields, as rental values decreased just -0.2%. Total returns were -2.6%. Over Q1 2020, capital values fell by -3.3%, while rental values decreased -0.3%. All property total returns were -2.0% for the quarter.
While no sector was immune, there was significant sector differentiation in overall figures and in underlying rental and yield trends.
A 22bps increase in retail yields was more than double that seen in offices (8bps) and Industrials (9bps), reflecting the greater immediate susceptibility of retail sector income to the fallout of COVID-19.
The retail sector suffered a -5.1% decrease in capital values over the month. Within the sector there was further divergence, the largest decreases were reported for shopping centres at -6.7%.
While the office and industrial sectors did not experience falling rental values, retail rental values declined -0.7%, further illustrating the vulnerability of retail income in the face of COVID-19.
Rental values were worst hit for high street shops at -1.2%. Total returns for the sector overall were -4.6%, pulled down by shopping centres at -6.1%.
The office sector recorded negative capital value growth of -1.6% in March. Rental value growth remained positive at 0.1% and total returns were -1.2%. This is the first month since August 2016, in the wake of the Brexit vote, that the office sector has reported negative total returns.
City offices was the most resilient subsector reporting the smallest decline in capital values (-0.6%) and total returns (-0.3%).
The industrial sector has fared very similarly to offices over the course of March. Capital values fell -1.6%, rental values increased 0.1% and total returns were -1.2%.
March 2020 was the first month in which industrials experienced both negative capital growth and total returns since July 2016.
“The CBRE Monthly Index gives the first real-time glimpse into the impact of Covid-19 on UK real estate valuations. At the all property level, capital values fell by -3.0% in March,” said Toby Radcliffe, Research Analyst at CBRE.
“Monthly falls of this magnitude are extremely rare, unprecedented outside of the Global Financial Crisis and the immediate aftermath of the Brexit vote in 2016.
“In the latter case values fell by -3.3% in July before returning to growth by October. In 2008 on the other hand, Lehman’s collapse in mid-September presaged a -2.8% fall in values for the month, followed by falls of more than -4.5% in each of the following three months.
“The scale of the current COVID-19 crisis and its impact on GDP has far more in common with the GFC than with Brexit; it remains to be seen if real estate will behave similarly.”
Extra protection for businesses with ban on evictions for commercial tenants who miss rent payments
Commercial tenants who cannot pay their rent because of coronavirus will be protected from eviction.
- Commercial tenants unable to pay rent because of coronavirus will be protected from eviction
- Measures support ongoing conversations between landlords and tenants about voluntary arrangements
- Latest measure builds on the unprecedented package of support for businesses already announced
Commercial tenants who cannot pay their rent because of coronavirus will be protected from eviction, the government has announced in an official press release.
Many landlords and tenants are already having conversations and reaching voluntary arrangements about rental payments due shortly but the government recognises businesses struggling with their cashflow due to coronavirus remain worried about eviction.
These measures, included in the emergency Coronavirus Bill currently going through Parliament, will mean no business will be forced out of their premises if they miss a payment in the next 3 months.
This builds on the unprecedented package of support announced for businesses who are affected by coronavirus.
As commercial tenants will still be liable for the rent after this period, the government is also actively monitoring the impact on commercial landlords’ cash flow and continues to be in dialogue with them.
Communities Secretary, Rt Hon Robert Jenrick MP, said:
We are protecting both people and their businesses by providing the urgent support they need.
We know many commercial landlords are already setting a great example by working closely with tenants and offering rent deferrals or holidays.
However, these new measures will provide reassurance to businesses struggling with cashflows and ensure no commercial tenant is evicted if they cannot pay their rent because of coronavirus over the next 3 months.
The Chancellor of the Exchequer, Rishi Sunak MP, said:
We are taking unprecedented action and doing so at unprecedented speed, because we know that businesses and their employees need help now.
That is why we are taking steps to change the law so that no company can be forced out of its premises due to loss of income. Alongside our support for workers and £330 billion of business loans and guarantees, this will help make a real difference to firms across the country trying to protect jobs.
Business Secretary, Alok Sharma MP said:
This measure will provide companies with an essential safeguard in these highly unusual times as they deal with the impact of coronavirus.
This is part of the unprecedented package of support we have put in place to protect jobs and livelihoods right across the country.
Mike Cherry, Federation of Small Businesses National Chairman, said:
Small businesses will wholeheartedly welcome the decision to ban evictions for commercial tenants for 3 months.
This will give piece of mind to millions of small businesses who are desperately struggling with their cash flow.
We know sensible conversations between landlords and commercial tenants are taking place – but having this legislative backstop to prevent evictions during the worst of the crisis will provide much needed peace of mind for many small businesses.
The Coronavirus Bill also includes new measures to ensure that Business Improvement Districts (BID) are equipped to continue their vital role in managing the impact of the crisis on local economies and helping town centres and high streets recover.
To ensure no area loses its Business Improvement District at this critical time, emergency legislation will allow a delay to ballots between now and 31 December 2020 until March 2021. This will ensure that they are conducted in a safe and effective way.
Simon Quin, High Streets Task Force Executive Director, said:
These are important steps that will strengthen town centres and commercial areas as they prepare for the future.
They will encourage retention of occupancy and ensure Business Improvement Districts can focus on support for their local areas through the emergency and into recovery. This will make places more resilient.
The amendment to the Coronavirus Bill on commercial leases will apply to England, Wales and Northern Ireland. It applied to all commercial tenants.
We will, of course, be working with the Devolved Administrations, including Scotland, across our coronavirus response.
The change will come into force when the Coronavirus Bill receives Royal Assent. It will last until 30 June, with an option for the government to extend if needed.
The new business information campaign has gone live with updated information available.
APHC WARNS OF POTENTIAL LEGIONELLA OUTBREAK IN COMMERCIAL BUILDINGS
The Association of Plumbing & Heating Contractors (APHC) believes there could potentially be an additional serious public health concern surrounding legionella once the current COVID-19 trading restrictions are removed, reports hvpmag.co.uk
The Chief Executive of the APHC, John Thompson, explained: “With restaurants, pubs, sports facilities, bed & breakfasts, hotels, hairdressers and many other leisure establishments being closed for nearly four weeks now, we feel there is an urgent need to raise awareness of the potential spread of Legionnaires’ disease once these establishments re-open as action needs to be taken now to stop a possible outbreak.”
Legionnaires’ disease is a severe type of pneumonia caused by the legionella bacterium. This disease can be serious if not treated immediately. Most people catch Legionnaires’ disease by inhaling the bacteria from water droplets dispersed through taps and showers.
The current lockdown means that the plumbing systems of the aforementioned establishments aren’t being used. If these redundant systems are not being correctly maintained, which APHC believes could be the case for many establishments, they can relatively quickly become the ideal environment for legionella bacteria to grow, as legionella bacteria multiplies in stagnant water, poorly designed water systems and in water with temperatures between 20oC and 45oC.
Although Legionnaires’ disease can be fatal, it is also treatable. However, to complicate matters, the symptoms of Legionnaires’ disease are similar to the symptoms associated with COVID-19 – high temperature, feverishness and chills, coughing, muscle pains, headache and diarrhoea with the potential to lead to pneumonia.
John added: “Landlords and employers have a legal duty to assess and control the risk of exposure to Legionella bacteria. Risk assessments, precautionary actions and remedial work can be implemented to protect against Legionnaires’ disease. However, we believe the vast majority of landlords and employers are unaware of their legal duty and of the actions that need to be taken.
“These are unprecedented times and never have so many buildings been closed for so long without any thought for bringing these buildings back into use, which if not facilitated correctly could lead to a serious outbreak of Legionnaires disease just as the country and the NHS recover from COVID-19.”
APHC is advising for landlords, property owners, and employers to take action now by contacting a suitably qualified plumbing and heating engineer in order to carry out a risk assessment, advise on precautionary measures and, if required, implement remedial work.
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