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The impending cash crunch for June quarter rents

25 June 2020: A recent ICAEW webinar looked at the challenges that the real estate market has faced during the pandemic. Annie Makoff-Clark reports.

The COVID-19 pandemic and subsequent lockdown have seen nationwide closures of large numbers of businesses and properties, many of whom are struggling with rental payments. Landlords are therefore experiencing significant cashflow problems, yet still need to meet financial obligations from lenders and investors.

Against this backdrop, the ICAEW webinar COVID-19: the impending cash crunch for the June quarter rents, led by Rosalind Rowe, chair of the National Taxation Policy Panel at the RICS. Nick Brown, FD of M&G Real Estate and independent consultant John Forbes, considered the consequences of the COVID-19 pandemic to landlords, investors and lenders.

Discussions focused on rent agreement modifications, the need for more governance and transparency and the importance of greater collaboration between all parties. 

Rowe told delegates that figures for the March quarter end were 48% (rent) and 46% (service charge) in comparison to 76% and 73% in 2019 respectively. 

Forbes said rent collections, although not catastrophic, were ‘well below’ expectations. One particular area flagged as problematic was student housing, with the purpose-built ready market one of the most significantly affected by the pandemic, along with retail and hospitality.

Looking ahead to the June quarter-end, Forbes warned there would be ‘even greater uncertainty’, with rent collection likely to be as low at 10%. Brown, however, speculated there could be an ‘upside’ to the June quarter: with retail and hospitality venues starting to reopen, the ability to pay rent will increase. 

Both Forbes and Brown said they’d seen considerable variations in what landlords agreed with their tenants around rent holidays, deferrals and rent reduction.

“Many landlords are willing to help, but they will want something in return,” said Brown. “Landlords need to consider what tenants are experiencing, yet for those who are still occupying, not paying is not a fair outcome.”

Last Friday (19 June) the government published the Code of Practice for the commercial property sector during Covid-19 which calls for greater collaboration between both sides. 

“Landlords, tenants and lenders must speak to each other,” Forbes insisted. “Lenders and borrowers also need to be negotiating.”

Forbes and Brown called for a catalogue of improvements in the sector including improved governance around managing conflict of interest among investors, excellent transparency, reporting and controls, better risk management and independent supervision around otherwise subjective valuations. 

Given that we’re likely to see what Brown described as a ‘fundamental shift’ in demand from real estate investors and occupiers due to the pandemic, it’s crucial that the sector can respond and adapt to a post-COVID-19 world.

“The real estate world is at a crossroads and tends to look inwards rather than outwards as an industry,” he said. “We’re moving towards a new normal, and we need to be mindful of that.”

So where are things headed? Brown pointed to research which suggests that demand for offices will decrease by 10% following the inadvertent success of mass home working set-ups. Forbes, meanwhile, predicted a new environment for retailers where more consumers will buy online than in-store, a trend we’ve already seen in the past ten years. 

“Retail sites will be used differently. Some tenants may have premises which are not usable in their current function post-COVID-19.” 

Then there’s the issue of regulation and governance, especially around valuation and sustainability reporting, which Forbes is particularly keen to encourage auditors to help push for with their clients.

Ultimately though, it’s about adaptability. “We have to change as an industry,” Brown said. “We need to see this as a call to arms, to be much more open-minded and look to other industries and how they’ve approached this, and not just look within real estate.”