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Commercial landlords grapple with coronavirus closures

Retailers and leisure companies have requested rent holidays or reductions from landlords, which will put further pressure on property groups' rental income
March 24, 2020

In the wake of widespread closures of non-essential shops, pubs, restaurants and leisure facilities, landlords trying to predict the stability of rental income arguably face a tougher task than ever before.

Some retail and restaurant businesses, including Burger King and Italian restaurant chain Carluccio’s, have already announced plans to withhold rent as they attempt to preserve cash. That follows the government’s announcement that the moratorium on residential rents would be extended to those on commercial establishments under the emergency coronavirus bill, with tenants unable to pay rent protected from eviction if they miss a payment over the next three months. 

However, while the government has said it was “actively monitoring the impact on commercial landlords’ cashflows”, the British Property Federation has argued that landlords would “need further intervention from government”, including measures such as rent subsidies to tenants.

Ahead of quarterly rents being due on 25 March, NewRiver Reit (NRR) chief executive Allan Lockhart said some tenants had requested some form of rent relief, ranging from a six-month holiday to switching from quarterly to monthly payments. 

The group would be judging tenant requirements on a “case-by-case basis”, said Mr Lockhart. “[We are] not going to support a company that is structurally challenged in any environment,” he said. 

However, the previously announced business rates holiday would save its tenants a combined £40m, equivalent to a six-month rent holiday, he added.  

For commercial property groups, which still need to make debt payments and foot operational expenses, conserving cash and boosting liquidity has become a priority. NewRiver Reit scrapped its fourth quarter dividend and suspended acquisitions and West-End landlord Shaftesbury (SHB) has also confirmed that no interim dividend will be paid this year and that it would be halting spending on new development schemes and acquisitions.  

Landlords were already battling declining footfall on the high street and in shopping centres, which had weighed on rental income and asset valuations. For some UK-listed groups, that has pulled-down interest cover - typically defined as net rental income as a proportion of net finance costs - and pushed up loan-to-value ratios, both metrics that are used to set debt covenants for companies across the sector.  

In March, shopping centre landlord Intu (INTU) warned that a portfolio decline of 10 per cent could create cure requirements of £113m and a £161m repayment of the revolving credit facility, following a 9 per cent decline in net rental income last year and a reduction in the portfolio value of more than a fifth. 

In the short term, lenders will be more likely focused on the security of the income they stand to receive from landlords, rather than asset valuations. “I think it's the interest cover ratios and other income-testing covenants that are more important at the moment, given they are less practically difficult to test than LTV covenants,” said partner in Clifford Chance’s real estate finance team, Barry O’Shea. "LTV testing may well be deferred at the moment so that lenders can get a RICS-compliant valuation, which we are hearing is difficult to get right now." 

For those with debt maturing in the near-term, the risks associated with securing refinancing is higher. “For any loan coming up for refinancing right now, the borrower should be looking for an extension, said Mr O’Shea. “It will be very difficult to agree new financing right now.”

However, the cost of borrowing could be less favourable if lenders feel the risk associated with an individual borrower or the sector has increased. 

In the event covenants are triggered, lenders can demand a cash injection or cure, grant a short-term waiver, demand full repayment of the outstanding balance or - as a last resort - repossess assets.  

"Prudent borrowers will be proactively and pre-emptively reaching out to lenders to request that, in some way, covenants are not tested during the worst effects of this pandemic", said Mr O'Shea.   

The lack of liquidity in the retail property market and costs of operating assets such as shopping centres, will also make lenders think twice about whether they will be able to generate greater returns by appointing administrators and repossessing properties, said Colliers International co-head of retail, David Fox. “You need to balance that against the interest payments that you receive,” he said.  

 Outstanding debt (£m)Cash (£m)Available debt facilities (£m)LTV (%)Interest cover ratioNearest debt maturingICR covenants 
Capital and Counties557153715161.3 (Covent Garden: 3)2021Interest cover of 1.2 on Covent Garden
Capital and Regional4279645463.12023Weighted average interest cover of 1.9
Hammerson2,505281,200383.32021Weighted average interest cover of 1.2
Intu4,9162232396822021Weighted average interest cover of 1.3
NewRiver Reit5157245413.82023Interest cover of 1.75
Shaftesbury1,24529225242.72022Weighted average interest cover of 1.4
Source: Companies, Panmure Gordon