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Property income prospects dimmed by Covid-19

Focus has intensified on the gearing levels of commercial landlords and housebuilders as both segments rush to conserve cash
April 8, 2020

Some commercial property groups were already facing immense pressure on their rental income streams long before Covid-19 reared its head. For retail property landlords such as Hammerson (HMSO), the government-enforced closure of all nonessential retail stores and leisure facilities has meant heavy reductions in rent collections, with the aforementioned group collecting just 37 per cent of UK rent billed for the second quarter.

The immediate challenge facing commercial landlords is keeping loan-to-value and interest cover ratios in check with the ceilings set out in their debt covenants. The latter – defined as net rental income as a proportion of finance costs – will be most pressing given the pressures on retail and food and beverage tenants. Whether landlords brush up against those covenants and are forced to inject cash cures either from reserves or, more unlikely, by selling assets, will depend on how long closures are enforced and the financial state tenants find themselves in. 

While the income prospects of many commercial landlords remain dim, so too do those of the FTSE 350’s housebuilders. Almost all of the sector’s constituents have scrapped planned dividend payments that were due over the coming months, including Persimmon (PSN) and Taylor Wimpey (TW.), which were among the highest dividend payers on the index. 

The immediate threat to housebuilders' revenue will come from a decline in volumes now activity on constructions and sales sites has been halted, housing transactions have been put on hold and lenders have withdrawn higher loan-to-value mortgage products. However, housebuilders, which have a low level of operational gearing, are highly sensitive to sales prices. A sustained downturn in prices that could follow a longer-term economic downturn would squeeze operating margins and increase the time it takes housebuilders to return to dividend payments. 

However, there are corners of the real estate market that seem to be more defensively positioned against the economic disruption that has accompanied the outbreak. Warehouse landlords Segro (SGRO) and LondonMetric (LMP), which have both seen their rental income swell in recent years due to the rise of e-commerce, managed to collect a higher proportion of rent due in respect of the second quarter than those operating in the retail and leisure sectors. The latter group collected 85 per cent of advance quarterly rental payments due on 1 April and expects a further 7 per cent to be received shortly. For Segro and LondonMetric, which both confirmed they would pay dividends during the next month, rent would need to fall by 80 and 58 per cent, respectively, before debt covenants are tested.

See below for our entire FTSE350 review:

FTSE350 profitability: the direction is clear but not the severity

FTSE350 Review: Coronavirus and the dividend dilemma

FTSE350 groups scramble for cash

Aerospace on the descent as defence stays on course

Banks face capital test

Construction hits the brakes once again

Coronavirus threatens electronics and technology

Engineering and industrials braced for a downturn

Few guarantees for financial services

Food and soap in high demand

Coronavirus slams high street doors shut

Home renovations on hold

Insurers stuck between policies and politics

Miners hold on to their hats in Covid rout

Supermarkets thrive but coronavirus harms other personal goods

Oil companies suffer Covid-19 crunch

Pharma giants entering the testing fray

Property income prospects dimmed by Covid-19

Subscription-based models make for sturdy businesses

Downturn threat obscures outlook for outsourcers

Are telcos still a defensive play?

Coronavirus wrecks UK leisure time

Utilities look resilient amid Covid-19 chaos