Much is written about the plight of retailers, but very few column inches have been given to the difficulties facing the retail landlord, except perhaps the startling collapse of Intu last year, writes Fiona Brownfoot, director, retail and leisure, Hicks Baker.
Intu was one of the UK’s largest property companies, owning many of the highest-profile shopping centres across the country including Lakeside, Merry Hill and Metrocentre.
Intu’s travails are being replicated nationwide, affecting a wide range of landlords including small private investors as well as larger property companies and pension funds. Few owners of shop property have been immune from the impact brought about by the changing shopping habits of the British consumer both before and since the Covid pandemic.
The softening in demand for bricks and mortar shopping, which has been exacerbated by the pandemic has caused rental and capital values to drop. This in turn has tilted the balance of loan-to-value ratios in the wrong direction which for some borrowers will lead to a breaching of their borrowing covenants and the possibly of foreclosure. The issues are the same for owners of shop property whether the property is small shop in a local parade or a multi-million pound shopping centre.
The effect of all the above was sadly demonstrated only too clearly at the end of 2020 when a shopping centre in Coventry, which had been valued at £37 million in 2013 was sold by the lenders for £4.9m representing an 87% reduction in value.
NatWest Group have recently announced the sale of a portfolio totaling £550m of distressed NPL (non-performing loans) secured against 25 assets, predominantly shopping centres. This unfortunately will probably become a common feature of 2021 and beyond and depending on the volume and the manner of disposal, this could have a further damaging effect on capital values.
The pandemic trading restrictions have arguably affected shop-owning landlords more negatively than their retailing tenants, who the Government has been demonstratively keen to help and who have been on the receiving end of a wide range of measures of financial support, particularly those at the smaller end of the market. Such support has included government grants, local restriction support payments; business rates holidays as well as the Furlough scheme.
The truth is that the Government has turned its back on landlords from the start of the pandemic and indeed positively discriminated against them by limiting the action they can take against their tenants for the non-payment of rent. In many cases landlords will not have received rent for 12 months putting some in the invidious position of having to meet loan repayments without the income with which to pay.
A landlord’s cash reserves will determine whether they sink or swim and in the event that their retail tenant enters some form of insolvency arrangement, landlords will potentially have to bear the cost of clearing the property of their tenants fixtures and fittings, address any accrued dilapidations (repairs) pay rates, insurance and utilities and cover the costs of security and pay both their and the administrator’s costs as and when the lease is surrendered, while receiving little or no co-operation from the administrator.
Ultimately, cash may also be required to top up the equity held in a property to restore the loan-to-value ration in order to avoid losing control of a property to their lender.
All too often commercial landlords have been cited as greedy or aggressive when merely enforcing their contractual rights. This view merely demonstrates a lack of understanding of the landlord and tenant relationship and the risks owners take on when acquiring and managing property. The time has come for this to change and for the world to appreciate the role that owners and investors play in UK Plc in providing space for others to occupy.
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