Join our community of smart investors

Shaftesbury shows landlord pain will endure far beyond lockdown

Playing host to the entertainment mecca of the capital’s West End means property titan Shaftesbury (SHB) has felt the blow of lockdown particularly sharply, amid a steep decline in tourism and domestic footfall to Central London. 

The group - which began offering tenants the option to switch from quarterly to monthly payments in October - collected just 36 per cent of January rents and waived almost half of the amount due. A fourth quarterly collection rate of 45 per cent was behind an average of 68 per cent across the broader retail industry, according to data from property management platform Re-Leased.  

Rent collection (by day 60) (%)Dec-19Mar-20Jun-20Sep-20Dec-20
Source: Re-Leased    

Shaftesbury is realistic about the prospect of a near-term recovery in rental income. “We can’t withdraw the support overnight,” says chief executive Brian Bickell. “The reality is these businesses have been hugely damaged and they don’t have a lot of reserves left.”

More recently, the group reported increased interest from food and beverage operators looking to open into recovering footfall later this year. Yet the trade-off has been offering slightly longer rent-free periods and some stepped rents to entice restaurateurs to take space. Retailers are requesting shorter leases and more turnover-based rents. These trends seem likely to endure across the industry far beyond the end of social distancing restrictions. 

In 2016, leases of between six and 10 years accounted for around 55 per cent of deals, according to data from Savills (SVS). By 2020 that had reduced to just over 30 per cent and by 2022 is forecast to account for less than 15 per cent. 

While retail and leisure operators struggle to rebuild their cashflows as we emerge from lockdown, affordability constraints seem likely to weigh on the level at which rents will be set in new leases and reviews. What's more, as the pandemic hastens the demise of some retail and leisure operators and forces others to cut back their footprint, the oversupply of commercial space in town and city centres also seems likely to become more acute. Tenants should be able to negotiate harder on lease terms.

In a more competitive environment among landlords, Shaftesbury has some advantages over the more vanilla operators: a near-impossible to replicate portfolio in traditionally high footfall West End locations that have a unique cultural heritage and smaller units that may prove more appealing to risk-averse occupiers.   

However, the fact that management recognises that there may be a need for further interest cover covenant waivers beyond July - the nearest waiver expiration date - is a reminder of the strain landlords are under in balancing the need to meet their own debt obligations with a necessarily pragmatic approach to collecting income owed. November’s £294m equity raise provided some comfort to Shaftesbury shareholders - and its lenders. Yet it remains to be seen to what extent investor appetite will endure for - what seems an inevitable - rise in fundraising activity within the sector later this year. 

Shares in beaten-up retail landlords such as Shaftesbury, Capital and Counties (CAPC) and Hammerson (HMSO) have rallied since the prime minister unveiled his timeline for easing lockdown. Yet investors would do well to remember that tenants opening their doors will far from solve the fundamental challenges facing many in the sector.