For many of our retail and hospitality portfolio businesses, rents are among their largest outgoings and, in the current uncertain times, it is no surprise that many are taking a much closer look at their property costs and embarking on a constructive dialogue with landlords.
As part of a series of topical debates, I recently hosted a discussion with some of our portfolio businesses and property experts from both Colliers and BDO. Below they share their views of the current rental environment for businesses post-COVID.
I believe the impact of the pandemic is the biggest issue faced in our lifetime and has brought about an unprecedented situation for operators and landlords. While lots of tenants are currently taking rent holidays and/or deferments, they are seeing much more success when a more holistic approach is taken and when tenants are open and deliberate in their communication with landlords, with a focus on the long-term view.
Landlords are open to discussion and the most successful ones will be those who really understand their tenants’ business models as, ultimately, they too want the business to be viable. It is the tenant’s job to enable landlords to fully understand and trust what is being asked of them, why it is being asked and why it is in both parties’ best interest. Now, more than ever, there is a real need to build trust between landlord and tenant, and good, effective communication has always been the best way to achieve this. It is also important that tenants do their homework in order to understand their landlords and their objectives. Every landlord has slightly different drivers and meeting your landlord halfway with issues important to them will help strengthen the relationship, while helping you achieve some of your objectives. With the end of the Government’s lease forfeiture moratorium (which protects businesses from landlords repossessing commercial properties) fast approaching at the end of September, there is a pressing need for tenants and landlords to work together to reach an agreement during this window.
Many landlords have flexed their rental conditions, and most, while being optimistic about a recovery, are pragmatic and expect it to be long-winded. I am seeing many landlords prepared to be open-minded about future rental concessions and willing to consider extending their support beyond lockdown.
After this period of social distancing and lockdown, there will be many great opportunities for businesses seeking to roll out new sites with a stock of available properties in the market. It is also likely that operators will seek better protection, for example, potentially seeking shorter break periods and more balanced rent models. Colliers anticipates an accelerated move to turnover rents or even real-time footfall-based rents, with at least a proportion of the rent being dependent on business performance and/or footfall, in order to de-risk operators. The key, as ever, will be for tenants to take the initiative and start communications with landlords in order to come to a mutually-beneficial arrangement.
Consensual negotiation with the landlord is a better option than an insolvency process in almost every situation, and early communication with the landlord would be well advised. As a starting point, she suggests preparing a short term cash flow for the entire business, not just the relevant sites, with assumptions made about revenue and costs post-COVID, which can be presented to the landlord with a proposal of what the tenant can afford to pay. While some businesses may be considering a CVA or administration as a possible alternative in order to reduce or remove property costs, both will have a severe impact on the operation and reputation of the business.
The Government has introduced a new restructuring tool, a moratorium which formally gives struggling businesses space to pursue a rescue plan, safe from action being brought against them by creditors, while the directors remain in control. Any insolvency process, including this new option to enforce a moratorium, is not to be taken lightly and the risks involved need to be understood fully, before exploring these as last resort options.
While both the retail and the food and beverage sectors have been among the worse hit, the pandemic has simply exacerbated the problems on the high street, especially for those who have not yet achieved a good online presence, as it tried to compete with online shopping. In contrast, prospects for F&B are brighter with consumers still wanting to go out to restaurants and bars. Those who are using this opportunity to vigorously review and evolve their business models and cost bases, and who are working hard to drive efficiencies, will have a much better chance of survival during this downturn and will be able to thrive on the other side of the crisis.