"The unprecedented economic challenge has left many businesses in a very vulnerable state despite the raft of measures the government has introduced in an attempt to mitigate the most painful aspects of the COVID-related lockdown. This is, perhaps inevitably, reflected in both a cyclical and structural challenge for the commercial real estate market", says Simon Rubinsohn, chief economist at RICS.
Re-Leased analyses live rental collection data from over 10,000 commercial properties and 35,000 leases on its UK commercial property management platform. The insights are a clear illustration of market challenges, with the data showing that 54% of commercial rent was outstanding on day seven of June Quarter. On the June Quarter day, 18.2% of rent was collected, with this figure increasing to 46% by 1 July. The data confirms that each sector is responding differently to the crisis, as well as variations across regions, and with the use of credit notes doubling, this highlights agreements for rent-free periods. "Feedback from respondents to the RICS Commercial Property Survey provides clear evidence of the weak underlying picture, suggesting not just that tenants are already looking to occupy less space but that expectations around future rents are reflecting the shifting macro landscape", comments Rubinsohn.
Re-Leased’s data also provides a breakdown of 10 regions across England and Wales, showing significant variations in rent collection. The average rent collection as of 1 July was 46%. The West Midlands has emerged as the most resilient region, with 61% of rent collected, while the East of England is the least resilient with only 25% of rent collected. As of 1 July, rent collection in London is tracking slightly below the UK average at 45%.
Retail is the only sector where tenants have paid less than half of the rent due for this quarter. Rubinsohn notes that the virus-related lockdown has "given a big boost to eCommerce" linking to the underlying picture indicating that tenants are already looking to occupy less space. Nonetheless, it is encouraging to see the rate of retail rent collection has jumped by nearly 30% in seven days from 14 to 40%. Continued rent collection for the remainder of the quarter will be challenging, and we continue to encourage transparency between landlord and tenant as outlined in the recently published Code of practice for the commercial property sector.
As of 1 July, 53% of the rent in the industrial sector had been collected. This figure shows a three percentage point increase from the percentage of rent collected seven days after the March Quarter day (50%). Also, industrial occupiers were the greatest benefactors from credit notes, with 3.9% of total rent being credited after just seven days. This illustrates that a larger proportion of rent is being forfeited by landlords to ensure tenant longevity.
On the other hand, as of 1 of July, the office sector had softened by -1% compared to the last quarter with rent collection decreasing from 53% on day seven in March, to 52% on day seven in June. As the crisis lengthens and people continue to work from home, the office sector could face the most dramatic long-term impact. Rubinsohn states that "insight from the RICS Commercial property survey suggests almost half of contributors believe businesses will scale back their office footprint by at least 10% over the next couple of years. While the latest policies announced by government that are designed to drive the economic recovery provide some reason for encouragement, it may be premature to assume this will significantly ease the pressure on the sector, given the behavioural changes that are emerging in the wake of the virus".
So what does this mean for businesses? Roger Weston, a partner at Saffery Champness LLP, shares his thoughts: "This data demonstrates the significant financial challenges that lie ahead for landlords, in particular from a cash flow perspective. An important step for landlords now is ensuring they have detailed financial modelling for future periods, taking account of the issues with rent collection. Many landlords will now have inevitable challenges ahead in terms of both managing cash flow to service debt, tax obligations and maintaining properties.
I would hope many landlords and tenants can adopt the recently issued government Code of practice to ensure appropriate action can be taken as soon as possible to allow rental agreements to be reached and honoured.”
Since the start of lockdown Remit Consulting has worked alongside the RICS, BPF, and other industry leaders, to build on REMark, its rent and service charge collection survey that’s been running since 2010 – what observations have they drawn from their data during this period?
The data comes from 125,000 leases on 31,500 prime commercial property investments across the country and is based on consolidated figures from the largest managing agents, REITs and funds.
Our data showed that, following the government’s moratorium on re-entry or forfeiture of commercial leases for non-payment of rent, the rate of collection plateaued, with many tenants apparently choosing not to pay despite the introduction of the government’s Code of practice for the commercial property sector.
The research allowed RICS and other partners to keep the government informed about the crisis in the property sector, with up-to-date, accurate, and verified information.
The latest data reveals that while the trajectory of the collection rates for the June Quarter is mirroring that witnessed during the March Quarter, initial collection levels have fallen and the shortfall this time looks likely to be even bigger than in March.
Using market size numbers from the IPF, we calculated that the shortfall for March equated to £1.5bn of lost rent across the whole property investment market, so a £3bn shortfall over the two quarters is quite plausible. This prospect is a big concern for pension funds and insurance companies, as a fall in their income will inevitably hit the wider population, many of who have finances that rely on these institutions.
In 2019, Remit Consulting’s RICS insight paper The use and value of commercial property data highlighted that the industry was already at a tipping point with regard to the exponential growth of real estate data. The pandemic has brought data analysis into sharp focus and confirms our industry’s need to develop data standards that are open-sourced and applicable globally.
Related competencies include: Economics