By Carl Foreman, Managing Director, MPML
Over the last few weeks our worlds, personal and work, have been turned upside down and we have all had to adapt to and embrace a new reality as we start to prepare for life post Covid-19.
In preparation for this, the government has made some very bold and some very welcome decisions, with funds available for staff furlough, rates holidays and vat deferment. However, the government has also made some decisions that will be more welcomed by some sectors than by others. But in all cases, every one of us will be affected in the longer term by the effects of Covid-19.
I have had a long career in retail and have been fortunate enough to have seen all sides of the equation. I have been a retailer, a shopping centre manager, worked for a bank and for global real estate firms. I have dabbled in asset management and leasing and have spent most of my working life in property management. I have also been through the chaos of the 2008 financial crises and its impact on property and property management.
But I have never been as worried as I am now about the future of our industry.
Make no mistake, property will always remain a good investment and long term, will generate a good return based on its location, what it offers to tenants & customers and what it is purposed for.
However, what scares me the most, is the potential inability of our tenants to either trade as before and/or to pay their rent and service charge costs. The immediate implications of this is the inability of some landlords, large or small, to meet banking obligations or, if they can meet those, to then meet other costs that they are responsible for including rates and service charge on vacant units.
Please do not get me wrong, I appreciate that with no revenue, a tenant cannot be expected to meet its full lease obligations, even with some of the government grants or schemes. However, the same applies to landlords and their banking covenants. It is not about the current period that concerns me as much as it is about the next 6-18 months.
For many landlords and tenants in the UK, there has always been an undercurrent of “us and them”, with the balance of power swaying between both parties over the years: complete independence.
But, how will the next few months and years pan out? Will landlords be able to meet their banking requirements? Will banks be prepared to call in loans? Will shopping centres be able to be sold? What will the impact of this be on your and my pension funds, as they tend to be the biggest investor in real estate? How will property be valued, and do we even know what those values will be based on?
How many tenants will survive the next few months? And if they do, will their sector be changed forever by greater use of online shopping to order food, buy groceries or ordering more clothes than one needs to so that they can be tried on at home, before either returning them to a store or an online collection point.
Will shopping centres or offices actually be able to open in the next few months or will they be deemed either too high risk in terms of social distancing, or even more worrying, simply not to have the funds to be able to pay essential suppliers to allow them to re-open. Perhaps they will open, but on much reduced hours.
Either way, footfall will be affected for the rest of this year, if not further into 2021. It will eventually bounce back, as human nature requires that we socialise, even if the places we choose to socialise in have changed.
But turnover will be also be down and may remain so for many years to come. Lease obligations will be affected, which could lead to more serious issues around the long-term condition and/or viability of the asset. And should the spiral continue, it will become irrelevant as to who has the upper hand, as there will be nothing to have the upper hand over.
So how do we fix this?
Firstly, we all need to accept that we are in this mess together and no-one is really at fault. More importantly, both sides bear an equal responsibility for the solutions to be arrived at. Tenants and landlords need to put aside their past animosity and accept that what has been put in place in the past, the Landlord & Tenant Act 1954, upward only rent reviews, CVA’s and pre-pack administrations to name but a few, are exactly that - relics of the past, put in place for the right reasons (one hopes) at the time, but no longer part of this new modern world. They will still be there to rule over old deals but those will change, and hopefully a new way of agreeing terms will be found that recognises the joint responsibility of tenants and landlords to work together for the greater good; for their joint survival.
Turnover will become the common thread that binds us on our new journey. It must be shared, treated with respect and nurtured fairly by both parties for the greater good of both livelihoods. Because the success of one depends on the other: total inter-dependence now, no longer independence.
Hopefully in years to come, we will be able to look back on the terrible events of Covid-19 and realise that the human spirit is stronger than ever, that lessons have been learnt. That we are better with our management of nature but most importantly, that we all need each other when the chips are down and that together, we are always stronger. In our personal lives and in business. Let us just hope that we learn these lessons sooner rather than later for the property industry.
