Last week, we explored the impact that COVID-19 has had on the UK’s retail sector. If you missed it, you can catch up on that discussion here. In a nutshell, the March-June lockdown could very possibly have been the final nail in the coffin for the UK retail sector, which was already struggling to keep up with changes in consumer behaviour and reductions in household spending. Time will tell. But in the meantime, who’s paying the rent on the premises that formerly housed the UK’s retail giants? The answer is… still up for debate!
This week, we’re looking at the knock-on effect that the retail catastrophe has had on the commercial property industry. At first glance, Retail and Property might not seem closely related, but bear in mind that they are both part of a chain of ‘services’ that rely on demand. The failure of UK retail is not an indication that there is no longer a demand for goods like clothing, but that consumers no longer require the services of retail businesses to source and present these items on physical shelves. Likewise, the demand for property remains high as ever, but the demand for rented commercial property has dwindled as retail outlets become outmoded.
The obvious solution for property owners is to adapt: abandon the commercial property niche and rather meet the growing demand for residential property. But, it’s not that simple. While landlords may intend to make this switch, most commercial property owners and tenants are locked into extended leases that typically span a decade or more.
Even in cases where both parties could, in theory, be released from those agreements, it is hardly in landlords’ interests to let tenants off the hook when the economy is so uncertain. Who has the ready cash for top-to-toe renovations and re-letting expenses? (Not to mention the loss of rental income during the period of transition, or the mounting costs of keeping a vacant property, like security and insurance). [link to blog posts on vacant property insurance and costs of securing a vacant property.]
So how are landlords navigating this time? Many are simply limping along with their struggling tenants, gratefully accepting any rent that comes their way. And in many cases, ‘any rent’ is not very much. According to a survey conducted by a leading UK consulting firm, 59% of retail tenants were unable to pay rent for the first quarter, with only 6% of defaulters managing to pay after a short extension. The next two quarters have seen even worse figures, with some commercial landlords receiving as little as 1 tenth of their quarterly dues in June.
There have been attempts at cooperation, though the power imbalance between the two industries has made this tricky. And the balance of power in commercial landlord/tenant relationships is not what you might expect: unlike residential landlords who deal with individual tenants, commercial landlords are owed rent by massive corporations with expensive legal teams at their disposal. Many independent UK landlords have had little recourse against ‘household-name’ corporations defaulting on rent. Retail business leaders have called for landlords to “work with them” to see both industries through this difficult time. But, finding mutual ground has not been possible in many cases, despite the high-profile nature of some of the negotiations. For example, H&M (clothing and homewares outlet with over 300 stores UK wide) threatened to break their lease agreements if sales did not pick up by mid June, and Primark simply defaulted on rent to the tune of £33 million.
Clearly, all is not well for commercial landlords! If this picture is beginning to seem too bleak to merit further reading, don’t worry—next week, we’ll look at some of the more creative options available to tenants and landlords during the economic fall-out of COVID-19. See you then!