Rent growth slows in Q2 2020
The true impact of coronavirus on commercial property rents will not be apparent until Q3 statistics emerge however, average rents are already showing signs of slowing following a period of reasonable growth across the Ayrshire region. The industrial sector is expected to be the most resilient of the main property types in the face of the pandemic, but elsewhere we are likely to see a significant reduction in leasing activity in the weeks and months ahead. The BoE said it expected the UK economy to contract by 25% in the second quarter of the year, having already shrunk 3% in the first quarter. Its “illustrative scenario” predicts GDP falling 14% in 2020 as a whole, before rebounding strongly by 15% in 2021. In the short-term, average rents are likely to be impacted by reduced take-up and increasing supply.
Average rents across Ayrshire over the past year (per sq ft per annum)
Government Business Grants
A range of grants have been made available through the government’s Business Support Grant Scheme. At close 5th May 2020, Local Authorities (LAs) reported that over 71,000 applications have been received for the Small Business Grant Scheme and the Retail, Hospitality and Leisure Business Grant Scheme across Scotland. Of these applications, 53,765 grants valuing £621m have been awarded. In Ayrshire, 4,024 grants valuing £45m have been awarded. The various grant schemes are summarised below:
Non-domestic rates updates
The Scottish Government has announced a range of temporary new relief measures for non-domestic rate payers in Scotland. A new 100% rates relief for 2020/21 will apply for all retail, leisure and hospitality sectors irrespective of RV. Scottish airports and eligible handling service providers will also benefit from 100% rates relief for the same period. There will also be a 1.6% rates relief for all sectors and properties for 2020/21. Properties must be occupied (also includes those forced to temporarily close due to Covid-19).
Forfeiture rights blocked
The UK Government has confirmed that commercial landlords will be prevented from exercising their forfeiture rights until 30 June 2020, where non-payment of rent is due to COVID-19. After 30 June 2020 (or any extended period), the right to forfeit will be reinstated, making tenants potentially liable for 6 months’ rent at that point. This temporary right may not be attractive where a tenant could not foresee making that lump sum payment once the moratorium is lifted. A rent concession may therefore be more attractive to both parties — for example overall rent reduction or deferral, rent free period or change to the usual payment cycle i.e. quarterly to monthly payments. Concessions would need to be agreed and documented (usually by side letter), being clear that the concession is temporary. Contact us if you need any further advice.
Lease re-gear opportunities
In the current economic climate and the severe impact of Covid-19 on sections of the economy, the re-gearing of a lease presents an important opportunity for both landlords and tenants to re-balance their commercial objectives in order to achieve a mutually beneficial outcome. Re-gearing usually focusses on the following:
- Rent free periods which can give a tenant the breathing space it needs to continue trading.
- Reduced rents and monthly rather than quarterly payments which can assist a tenant with cashflow.
- A landlord may be prepared to offer rent free periods or reduced rents in return for extended lease terms or the removal of a tenant only option to break.
- Removal or repositioning of rent review clauses. A landlord may take the view that the removal of an upward only open market review is a price worth paying in the current market.
- Rent deposits and whether they can be returned to the tenant either in one lump sum or by staged payments by the landlord.
- Flexibility on assignment and subletting in order to give a tenant scope to potentially obtain an income stream from areas within a store which are not currently utilised.
- Capital contributions by a landlord to assist a tenant with re-fit works with a view to attracting greater footfall into a newly refurbished store.
Online retail growth
The latest data from the Office of National Statistics shows that the level of internet sales as a percentage of total retail sales continues to grow at pace. At the start of the decade internet sales accounted for 5% of total retail sales. At the end of March 2020, internet sales have reached over 20% of all retail sales. Furthermore, these figures do not fully reflect the current surge in demand caused by the coronavirus pandemic. Moreover the highest growth rate ever recorded was in the second half of 2016 in the immediate aftermath of the Brexit vote. This could suggest that in times of low consumer confidence people turn to online as they perceive it to be cheaper than the high street. Therefore, if as economic forecasts suggest, the UK is set for a period of lower consumer confidence then the industrial sector could stand to be the net beneficiary.