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Why financial strain may worsen for commercial landlords

A tsunami of corporate failures could be on the horizon. The number of businesses in significant financial distress jumped by almost 100,000 to 723,000 during the first quarter according to Begbies Traynor, the highest increase in seven years.  

The real estate sector has suffered the second highest jump in companies under severe financial pressure over the past year, according to figures from the insolvency specialist, with 51 per cent more businesses entering distress. More specifically, commercial landlords come in at number five on the list that covers 22 sectors, with a 46 per cent rise. For anyone that has taken heed of the dire rent collection levels reported by some of the UK real estate investment trusts (Reit) in the wake of the pandemic, this should be unsurprising. 

Cash-strapped retail and hospitality tenants, whose stores have been allowed open to trade for less than half of the past 12 months, have struggled to make rent payments. The retail sector suffered the highest shortfall in rent collection for the second quarter, with only 52 per cent of the amount owed paid, according to property management platform Re-Leased. That was the worst quarterly figure since the lockdown measures were first imposed last year. The moratorium on evictions for non-payment of rent, which is due to expire on 30 June, has emboldened some to withhold rent, some landlords have argued. 

Allowing retail and hospitality businesses to reopen their doors might instinctively seem like grounds for landlords to recoup lost income. Yet for some tenants, who have built up more than a year’s worth of unpaid rent, repaying much of the debt after months of burning through cash is unrealistic. 

Unmanageable levels of debt and overtrading are hidden icebergs that are waiting to sink even the highest profile businesses, said Begbies Traynor partner, Julie Palmer. A wave of insolvencies should be anticipated. “A very large number of those will be a hard core of zombies that we’ve had for the past 15 years and this will be the final nail in the coffin,” said Palmer. Ultra-low interest rates and a low level of enforcement action by banks has allowed many companies to limp along since the 2008 financial crisis, she said. 

With more companies going under, the pool of potential tenants is also likely to become smaller. “We’re in a marketplace at the moment where tenants are going to be much thinner on the ground and they’re going to be looking for better deals,” said Palmer. That is another consideration for landlords deciding whether to evict tenants owing rent once the moratorium is lifted. Begbies encourages property owners to think about how easy it would be to re-let a property. Negotiating some income is better than being left with no tenant for landlords who themselves have their own finance costs to service.

Dwindling prospects for recovery in rent levels will surely be reflected in further declines in the value of landlord portfolios. It is another reminder that the heavy discounts attached to Reits such as Hammerson (HMSO) and Capital and Counties (CAPC), versus their net asset values, are more than justified.