• Operational landlords face income, valuation challenges

Owners of operational real estate are being challenged to reassess values, as the pandemic continues to inflict damage on whole business sectors.
With tenants unable to pay rents at previously agreed levels, income streams have been damaged fundamentally. Retail and hospitality businesses, in particular, have been hard hit by coronavirus lockdowns. And government interventions have failed to fill the gap in income streams.
According to an analysis by industry group UKHospitality, the British hospitality sector alone will owe nearly GBP3bn in rent arrears, by the end of 2020. And listed property company updates have started coming with a new measure, the percentage of rents collected.
Typical of the situations sending shock waves through the industry is the latest proposal from coffee chain Caffe Nero. A company voluntary arrangement could see some landlords receive no rent for three years, as others would have previous fixed rental agreements torn up and replaced by turnover-related terms.
The move from Caffe Nero, which expanded fast in recent years, follows other CVAs and business failures that have left a string of landlords with empty retail units across UK and European city and town centres, and in major shopping centres.
Also in the wings is a threatened “take it or leave it” deal from fashion empire Arcadia, which could see its brands including Topshop close down dozens of shops – and continue trading in others only if old leases are torn up.
Landlords face the real challenge of using legal means to enforce rental payments from tenants. With many properties rented on fixed lease deals, the tenant remains obliged to pay, regardless of hindrances on their ability to trade, such as government lockdowns. Most landlords have sought to negotiate, wanting to keep tenants alive rather than risk their demise by demanding rental payments in full. Some, however, are taking a stronger line, with shopping centre landlord Westfield recently reported to be threatening legal action to recover rents from tenants including Pret a Manger, Hugo Boss and The Entertainer.
Many European governments have intervened to establish a new playbook for the extraordinary times of the pandemic. Speaking to the Financial Times, James Daunt, CEO of bookshop chain Waterstones, said the UK was a standout in not intervening. “The landlord/tenant issue has just been kicked down the road – if you look at France, Italy, the Netherlands or Germany, they have all got schemes in place or guidance on how the consequences should fall between the parties.”
Adviser Green Street noted in an October paper that US markets have repriced companies in recent months: “Core sectors, such as apartment, office, and retail, have experienced a drop in unlevered asset value of 20% to 30%. Many of the non-traditional (or niche) sectors on the other hand, have seen flat or increased pricing.” It called out the winners as being niche players in data centres, cold storage, self-storage and industrial.
The reduction in rental income – forced via a number of routes – is now being felt in revised valuations of company assets. Apart from current arrears and unpaid rents, valuers are turning their attention to income streams over the next three years, as they see whole sectors struggling to return to anywhere like the levels of business enjoyed in 2019.
At UK listed RDI Reit, recently posted a GBP103m loss for its latest full year, with its GBP1.2bn portfolio shrinking in value by GBP113m. The company has a mix of property assets with 27% in hotels, 24% in offices, plus industrial and retail. Of 18 hotels, five are rented long term to Travelodge, via indexed leases.
In the office and business space sectors, recent declarations have included listed group Workspace. It was one of the companies to act early on in the pandemic, to support tenants, by agreeing rent cuts. As a result, the company’s first half results swung to a GBP110m loss, as its portfolio was revalued down GBP126m at GBP2.45bn and rents fell from GBP60m to GBP37m.
In retail, landlord Great Portland Estates saw retail values down 18% in six months, taking its overall portfolio value down 6.6% to GBP2.538bn. Property conglomerate Land Securities booked a 7.7% fall in its overall property portfolio, as six month rental income fell to GBP191m from GBP309m. The value of its regional UK retail portfolio fell 20%, while there was a 13.1% drop in the value of its 23 strong portfolio of Accor branded hotels. The properties operate under leases running to 2091.
At LXi REIT, which has a mixed UK property portfolio, the company declared it had collected 97% of rent due in the previous quarter, one of the strongest performances in the market. The company’s ownership is 27% industrial, 24% budget hotels, 14% healthcare, 12% leisure and 11% discount foodstores. Among its hotel holdings are several Travelodge and Premier Inn properties, as well as a Jury’s Inn, and the Cambridge Belfry.
In the student accommodation niche, leading providers have also had a torrid year, as rents were hit by the fact that students could not attend universities, due to Covid-19 lockdowns and restrictions. Unite Group swung to a half year loss of GBP73.9m due to reduced valuations and lost rental income. Student landlord GCP is expecting to collect just 63% of budgeted rents this year, but has retained a portfolio valuation up 0.7% in the most recent quarter, to GBP1.01bn. And in an October trading update, Empiric Student Property said current occupancy was 70%, down from 94% a year previously, with like for like rent up 2.4%.

HA Perspective [by Andrew Sangster]: Last month Land Securities, the UK’s second biggest REIT (after industrial giant SEGRO), announced it was selling out of its hotels, leisure and retail park holdings.
LandSec has 23 hotels of which 21 are let to Accor on turnover-based rents. It put a GBP469m price tag on the properties, which compares to the other assets up for grabs,18 leisure parks valued at GBP649m and 10 retail parks at GBP444m.
The REIT said that it was cashing out of the sectors that were subscale and where it had little or no competitive advantage. It added that “structural growth areas” were under-represented, something I suspect many readers will disagree with when it comes to hotels.
What was good news for the UK was LandSec’s determination to double-down on London. It argued that the UK capital “will continue to be a magnet for global capital, talent and tourism”. Evidence from EY and ULI was given suggesting the City of London was the top global business district and Canary Wharf the 5th. There were just two European rivals in the global top 15, Paris La Defense, 4th, and Amsterdam, at 15th.
In its half-year results announced on 10th November (for the period to 30th September), LandSec showed that the value of its hotels portfolio had dropped 13.1% with the leisure properties down 15.3% and retail parks down 7.3%. Less than half (47%) of rents had been paid on these three portfolios for rents due by 29th September.
An interesting aspect of both the Capital Markets Day and half-year results presentations was LandSec’s focus on being an active owner. While it was exiting a number of operational real estate businesses, LandSec was adamant on the need to engage in operational risk.
The CMD presentation also laid out a clear framework for coping with Covid: “We are managing near-term challenges proactively and focused on positioning the business for the undoubted post-pandemic opportunity.”

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