As the world grapples to defeat Covid-19 and understand what the outcome of the pandemic will be, the Association of Real Estate Funds (AREF) has initiated the AREF Crisis Forum to give its members the opportunity to discuss Covid-19 issues and share experience and knowledge to “help each other get through this crisis”.
On Tuesday 7 April the forum hosted its first call during which the panel shared insights into the challenges faced by the impact of valuation uncertainty and property management issues.
Whilst the real estate industry started 2020 with renewed optimism for the year ahead, the Covid-19 pandemic has generated uncertainty across the globe.
In the UK, the domestic and global uncertainty has resulted in some funds being suspended due to “material valuation uncertainty”. The rapid changes in the market mean that valuation is becoming more of an art than a science, preventing a reasonable degree of confidence in ‘typical’ values due to a lack of comparable evidence.
On the property management side, as the effects and implications of Covid-19 change on an almost daily basis, attention has naturally largely focused on the short term impacts. There has already been concern about rent collections for the March quarter day. However, the UK is only a few weeks into lockdown, and the panel highlighted that we are likely to see greater difficulty in terms of rent payment and collection in the run up to the June quarter day as the implications of the worldwide lockdowns filter through into businesses’ accounts.
The Coronavirus Act 2020 (the Act) has tried to bring into force special measures to assist business tenants and occupiers (for further details on this see our separate article looking at the Act and its measures).
However, the panel noted that landlords will also be affected heavily by Covid-19 ramifications and failures by tenants to pay rent. Many landlords will find it difficult to service their debt and this could impact the financial covenants in their loan agreements. There will also be an impact on distributions to shareholders and the values of pension schemes. There is a growing realisation that solutions will need to apply to the whole system not just immediate pressure points.
The panel’s advice to all parties was to engage in transparent and regular communication. It is in the tenant’s interest to have an open and honest discussion with its landlord about its financial position, including any cash flow issues it is experiencing, which Government support packages it benefits from and which support packages are not available to it. Whilst a tenant’s lease may not require the tenant to give the landlord this type of financial information, it is likely to aid more constructive discussions.
To survive this landlords and tenants need to work together to find mutually beneficial outcomes. Guy Glover (Fund Manager at BMO Real Estate Partners) emphasised that landlords’ fiduciary duties will not just cover collection of rent in the short term, but also ensuring that businesses survive so that they can collect rent in the future.
Some landlords are trying to tie rent holiday arrangements into a wider lease renegotiation (for example the grant of a reversionary lease or the removal of a tenant break right). However, the high level of uncertainty surrounding the duration of the pandemic and its impact on businesses and the letting markets mean that it is challenging to know what outcome either party wants from those longer term discussions.
The Coronavirus Act postpones the landlord’s ability to exercise its right of forfeiture until 1 July. Unless further legislation or guidance is put in place, this means that landlords could forfeit for non-payment of rent for the March and/or June quarters in July. Although it will be fact and market specific, generally it is not going to be in the landlord’s interest to forfeit in the current climate as this would affect rental income in an already uncertain market. It may therefore be sensible for companies to be given some space to recover once lockdown restrictions are relaxed before longer term discussions are had with landlords and/or lenders.
The effects of Covid-19 will touch everyone; investors, occupiers and lenders will all feel the pinch. There are few who will ride out the pandemic without being affected. It feels, to some extent, as if we are all in this together and it is therefore important that open and honest discussions take place so that parties can work towards mutually beneficial and workable outcomes that will support growth once the effects of the pandemic start to subside.
It is in the tenant’s interest to have an open and honest discussion with its landlord about its financial position and landlords’ fiduciary duties will not just cover collection of rent in the short term, but also ensuring that businesses survive so that they can collect rent in the future