The government’s decision to grant tenants a three-month moratorium on eviction spread financial stress from tenants to property owners and lenders.
By Nick Corbishley, for WOLF STREET:
Until two years ago, Land Securities was the UK’s largest listed commercial real estate company by market cap. It owns and manages more than 26.5 million square foot of property on the British Isles. The problem is that much of that property is in the worst possible sector — brick-and-mortar retail — at the worst possible time: now. And it’s showing. In its results for its last fiscal year, ended March 31, Landsec posted an £837 million loss — roughly seven times the £127 million loss it posted in the previous year.
The company’s shares have fallen 17.5% over the past three days, 48% since February 14, and 62% since since May 2015. Intraday today they traded at 499 pence, a new low, and closed at 521 pence. So the problems didn’t just start — but they just got a lot worse. Five-year stock chart via London Stock Exchange:
Besides its retail properties, LandSec owns a vast portfolio of London offices — including Deutsche Bank’s new London HQ at 21 Moorfields — and specialist assets consisting of hotel, leisure and other properties. Those specialist assets, together with its retail properties, represent about half of the portfolio’s total valuation. With the exception of supermarkets and pharmacies, most of those assets have been taken out of action by the UK’s lockdown measures.
“Our leisure and hotel assets were generally closed with turnover-related rental income severely impacted,” said CFO Martin Greenslade during a full-year earnings call. “In retail, shopping centers remain open for essential trading only and footfall all but disappeared.”
A year ago, LandSec’s property empire was worth £13.8 billion. Today, it’s worth £1.18 billion less. According to property valuers CBRE, £380 million of that write-down can be attributed to the lockdown; the rest is due to pre-Covid-related wear and tear, particularly in relation to the company’s retail and specialist assets — those hotels, leisure and other properties. Its retail portfolio lost more than 20% of its value over the last year, with some regional malls down as low as 28%.
By contrast, its office portfolio saw a 1.1% increase in value. But even that line of business faces huge uncertainty going forward. “We have kept our office assets open, but the level of usage is well below 10%,” Greenslade said. “Our development program has been delayed as our contractors adapt to implementing social distancing on site.”
The company hopes the vast majority of the tenants of its office buildings will keep renting more or less the same amount of space as they have done until now, even as they cut back on staff and keep many of their workers at home. Even so, the company expects a 20% fall in office rents over the next year.
That pales in comparison with the 75% slump in rents it envisages in its worst case scenario for its retail portfolio. Many tenants have already stopped paying rent. Just 38% of its retail tenants had paid their first quarter rents within 10 days of coming due, compared to 90% for the same period last year. Even if you include offices, the total amount of rent collected was still just 63% in March and early April. A year ago it was 94%.
Like many of its peers, including the struggling UK mall giant Intu, Landsec puts much of the blame for its vanishing rent collection on the government’s decision, in early April, to grant retail tenants a three-month moratorium against eviction. The moratorium was a vital lifeline for many retail businesses that had seen their incomes dry up as a direct result of the lockdown. But it also spread the locus of immediate financial stress from tenants to property owners and their lenders.
For the moment, the banks are willing to cut the property owners a little slack. The alternative option, of calling in the debts when many of the firms cannot pay them, would risk triggering a cascade of defaults that could bring down some of the country’s biggest and most indebted commercial property owners and would produce large losses for the banks. Even Intu, with its £4.5 billion debt overhang and its share price that has plunged to just 4 pence, has been given waivers on its debt until late June.
But the day of reckoning has merely been postponed. With time fast running out, UK commercial property owners are now politely asking the government for a lifeline of their own. “The government needs to support the economy as best it can,” said Landsec CEO Mark Allan, who’s just one month into the job:
“I don’t think landlords have a particular right or obligation to be at the front of the queue, but I do think government needs to be aware of some of the implications of some of the measures it has taken, and the moratorium on enforcement action is the most obvious one because that is going to create more cashflow strain for landlords than might have been the case,” he said.
The British Property Federation, of which both Landsec and Intu are both members, has exhorted the government to call out “can pay won’t pay” retailers, many of them global brands, which it accuses of taking advantage of the government’s moratorium to avoid paying rents despite the huge cash reserves they have on hand.
As the bitter standoff between retail chain stores and their respective landlords escalates, the UK economy, like just about every other national economy, slips deeper into the mire. It already shrank by 2% in the first quarter and by a record 5.8% in the month of March, despite the fact the UK government did not trigger the lockdown until the final week of the month. Economic activity in April, the first full month of total lockdown, will be much worse.
The brick-and-mortar retail sector, already reeling before the lockdown from a toxic cocktail of intensifying online competition, low profitability, high costs, escalating rents, and maxed out consumers, will be in the thick of the carnage. For the real estate firms most exposed to the sector, including Landsec, the pain has only just begun. By Nick Corbishley, for WOLF STREET.
A big driver behind soaring rents — the “Airbnb effect” that removed countless properties from global cities’ long-term rental markets — reverses. Read… Airbnb Gets Disrupted. Hosts, “Super-Hosts” Try to Survive. Apartments in Prime Locations Suddenly Flood Rental Market
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