Thursday, 21 May 2020

Landlords should move on lease terms

One of the key areas coming out of the current Covid crisis is the frankly terminal shock to the retail and leisure sectors. There simply has been nothing like this in history to compare it to in the modern age.

Restaurants and shops will fill up again, people are desperate for some normality as mile long queues to McDonalds' as they open up is demonstrating. However, it could be months or even years until social distancing restrictions, both regulated and emotional, are relaxed. Restaurants can't make money at 50% occupancy snd neither can many shops.

Equally, retail landlords are in a big fix, June rent roll is coming up and it could be a bloodbath. As the next quarter kicks in a lot of retailers will give up the pretence of trying to come back. Better to emerge with a fresh business and new rent rates than try and limp on with the accrued debt.

But the US and Europe have an answer, the answer is that lease terms move to share of turnover rather than fixed, upwards only, rents. Share of turnover, or even share of net income, will see businesses able to operate at reduced levels, but still pay some rent. Plus when the good times return, so do the rents to the landlords.

Crisis is a time for flexibility, the UK has long be afflicted by the deformities of the rent and business rates system which has ruined our high streets and many of our once thriving retail industry. With the additional burden of Amazon and now Covid the situation is dire, but the proposal above will show a way out that shares the costs appropriately between landlord and tenant.

23 comments:

Armchair Lawyer said...
This comment has been removed by the author.
Bill Quango MP said...

The retail parks that operated on that model have long gone. They could not make enough. Only the highest profile shops were really contributing. A huge boon for independents, but a dead loss to the landlord. Landlord takes a tenant on. Tennant
has a dumb idea. Some faddish eco leopard print thing that sells for £150. After the fad is over, the store continues on, selling at £5 a pop, instead of £50.

Usually, they have to fold. But under a T/O, they can carry on. One man band the whole thing.
Seen it many times. Especially with juice bars. Retro sweets. Jigsaw and calendar shops. Pashminas. Luggage. etc.

I don’t think it’s the answer. Though what is, I don’t know. Before covid town high streets outside the most prestigious market towns, were running anywhere from 20-50% vacancy rates. And, as we predicted here almost a decade ago, what replaces the lost chains, was barbers. Cafes. Charity and nail and tattoo places.

Convenience stores was the only serious revival we missed. They are in boom times right now. Their low point was around 2012. Financial crisis, Lidl and Aldi rise, hammered them. But the end of the ‘big shop’ was a boost for the ‘nip out and get’ shops. They are doing especially well in lockdown Britain.

Nick Drew said...

what troubles me is that swathes of the property market are deeply irrational

you'd think, well, property is a really liquid market (most of the time) so surely rational transactions would predominate - the exceptions being daft individuals who hold out for crazy prices until they go blue in the face, or (e.g. people inheriting a property they don't need) even beyond that point, letting perfectly good places literally go to wrack and ruin, for no gain ever

but no: there are nutters holding commercial properties, too - I could cite you extraordinary examples of big London (London!) landholdings that were clung too, brownfield, permitted and unoccupied, for literally decades - way beyond any landbank horizon or sensible speculation-awaiting-the-next-upturn

whoever can justify holding onto big-city property yielding nothing for years at a time?

in such circumstances, occupiers / would-be occupiers are the ones who are the more likely to act rationally, even if individually & piecemeal; and some landowners will go blue in the face, all the way unto death

rational markets? pah!

Anonymous said...

Wouldn't a minimum level solve the contribution issue? You pay x amount a month regardless, plus y% turnover.

Can even throw in some incentives there, such as cashbacks for paying more than the minimum for 12 months.

That should stop the knitted alpaca and spinach and raddichio smoothie brigade from mooching.

And High Streets need being turned into partial housing.

We've two shopping centres, joined Siamese-baby style, and enough retail to fill up maybe 80% of one. Both have parking, and one could easily be turned into superior apartments with a pleasant socialising area and with access to motorways, trams and buses.

But they'd rather build on greenbelt to farm council tax, and probably build another shopping centre in 5 years time.

E-K said...

The 'demand' for McD's is being funded by furlough money... once that stops, America here we come.

Anonymous said...

Why don't the landlords get together and fund various TV shows extolling the virtues and profits to be made by being a BTL retail landlord.

There will be enough mugs out there to fleece. After all look at the housing market.

Raedwald said...

The road to Hell, as they say ..

If you go to Porto and wander the little back streets and alleys, you'll find scores of dusty little semi-closed shops selling niche stuff like nail clippers; the window will have a sun-bleached display of 1970s nail clippers and bits of the window will be falling off.

I suspect this is the result of socialist rent-controls; so long as the shop (actually the shop hides a comfortable dwelling) continues to trade, the rent is frozen.

Preventing markets from adjusting just preserves economic inefficiencies. Let's take the hit and move on. The assets, as Mr Drew always reminds us, will remain.

Wildgoose said...

Perhaps throw in a small Land Tax to ensure that Landlords pay attention and show some flexibility?

(Runs away and hides...)

DJK said...

Nobody likes paying taxes, but I've always thought that residential property is under-taxed.

On another topic, what is the FT talking about with Thurrock council and solar electricity?

Nick Drew said...

DJK - Thurrock looks interesting

also see this
https://thebristolcable.org/2020/05/analysis-how-35-million-of-public-money-was-lost-to-bristol-energy/

some of these local councils run amok, given half a chance

DJK said...

ND: How different from Joseph Chamberlain and the Birmingham Corporation gas company and art gallery. (Very Alderman Foodbotham).
https://www.flickr.com/photos/ell-r-brown/6864979878/in/pool-blue-plaques-birmingham/

Michael said...

Hotel occupancy is geared to at least 75% for any stability.

Below that, it's 'Goodnight Vienna'...

I just can't see franchises surviving at all in many cases. Niche markets my just scrape through, but big groups like Intercontinental are due a nasty rough ride. They were trying it on a bit, back just before the Blair Brown recession, but nothing like this was around then.

Anonymous said...

This is the exact model that McDonald's has with their Franchisee's - the rents and service charges paid by the Franchisee are a percentage of sales, rather than a fixed amount.


An Onymous Coward said...

"or (e.g. people inheriting a property they don't need) even beyond that point, letting perfectly good places literally go to wrack and ruin, for no gain ever"

Yup, my in-laws have been in possession of an inherited property (nothing fancy, a semi in the north of England) for 7-ish years. It's now a wreck, for no other reason than they didn't need the money and couldn't be arsed to sell or rent it. And still they moan that some of their kids can't get a deposit together for their own place. They must still be paying council tax on it.

Still, it's the neighbours I feel sorry for, with a dilapidated, overgrown property next door or across the road. If it were anywhere desirable, it would be squatted.

andrew said...

Perhaps banks should move on mortgage terms.
If that place you bought for 400k with a mortgage of 300k is now worth 300k, perhaps fhe mortgage should be written down to 200k.
And the same with my overdraft if i get furloughed.

andrew said...

Not quite a debt jublilee.

Anonymous said...

Do those of us with a 400k house that's now only worth 300k, but with only a 100k mortgage, also get the 100k write down?
Hardly seems fair if only those with large LTV's get the benefit.

Anomalous Cowshed said...

Did someone say property was liquid?

Nick Drew said...

yes! I did

there can of course be sticky coditions in extreme circumstances (e.g. May 2020), as in any market: and extreme properties (esp. v large) can give rise to unusual issues

BUT

- if a seller is prepared to accept market price (or, of course, slightly below - that's how markets are, for inexperienced players: same for any commodity whatsoever) there will almost always be a buyer, for anything at all, in any condition

(see Homes Under The Hammer passim)

- ditto in reverse if you want to buy something

- there is transparency, active brokerage / salesmanship, and a number of market-makers

- there is finance readily available, legal support, any other associated service you need

What there also is, is a bunch of deeply irrational players (see comment above). The fact that Old Mrs Miggins' son and daughter, who've just inherited her old granny-house and are convinced it's worth £450k but "it won't sell" - when any fool can see it's a good deal less than that, as the estate agent gently told them - doesn't mena the market is illiquid, despite what they angrily think

andrew said...

It comes down to trust.
The brits trust that property will go up in price. And so it will.
Until the brits trust it will go down in price.

david morris said...

So, ND

The suspension of trading in Property funds (M&G/Standard Life) will presumably snowball to include other providers as we move into summer.

Best guess as to what level the Market will settle ?

Raedwald said...

The ONS are 'unable' to publish the HPIs beyond April .. I suspect this inability will last until the market upturns. Sensible move, not a conspiracy. There's no point pouring petrol on a blazing bonfire.

Nick Drew said...

@ Best guess as to what level the Market will settle ?

I asked that here a few days ago!