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Time Gentlemen Please

If you are retiring next Thursday and have more than half an eye on a perfect plot by the ocean in Florianopolis for $60,000 you might want to give your financial advisor a call first. You may need to down more than a glass of Ardberg before you do, mind, as the conversation might not go as well as it would have done had that call taken place at this time last year. There is a very good chance that if you have been on this planet paying into a pension fund for the past 25 years a growing share of your pensions pot has been emptied into commercial buildings in general, and shopping malls and complexes in particular. 

Even the most bearish investors thought that on a small island such as ours crowded with 67 million souls these investments would provide a steady stream of income for us, our children and their non-binary progeny's at-home android assistants for decades to come. This was a reasonable bet, bearing in mind that the nominal yield on a long-term American Government bonds has dropped from over 6% to less than 1%. Where else is there to safely store your money for the future? In February 2020 the UK Treasury yield on a three month T-bill was 1.56% and the ten year note was 1.59%. You ain't going to Brazil on that. I must admit to turning a little green when I read these numbers, as I am getting 0.0025% on my Post Office Savings Account and received 13p in interest last year (before tax).

However, as the NTI newsroom reported on NTI news bulletins five times last week and three times so far this, all over the world millions of commercial tenants have stopped paying rent. As previously reported on our app landlords are not able to use Commercial Rent Arrears Recovery until they are owed at least 90 days of unpaid rent. Alok Sharma joined the call for latitude to cash-starved tenants saying, "I know that businesses are under pressure, but I would urge landlords to show forbearance to their tenants".

Moving away from the jaw-dropping numbers KPMG are facing with the Intu Administration for a moment and getting more local, NTI's friend Petula ran the 'Tea And Glee Bar' just off Brick Lane in London until she was forced to close down in the middle of March this year. She paid £57,800 a year to her landlord and, on top of that, also had to fund service charges, business rates and a tables and chairs license. It all added up to more than £87,000 which, as she puts it, at £2.40 for a pot of peach cobbler guayusa is 36,250 pots. Even with growing sales of her 'special' brownies (which she often served under the counter) she knows she can never go back. Petula told us that five of her neighbouring shop owners have also closed down and will not re-open. The kibbutzim and Buddhist 'relaxation centres' in Thailand will do bumper business this winter.

As a commercial landlord a tenant may approach you to request a direct concession, such as a reduction or deferral in rent, having a rent or service charge holiday or paying monthly. It is entirely within the landlord's discretion whether or not they agree to such requests, but with news of mounting pre-packs and CVAs what choice do you really have? Taking a hard line will not help your tenant to survive this most historic of economic downturns, meaning the landlord may not receive rent in the future, being left with vacant premises and massive uncertainty over prospects to re-let in the post-coronavirus environment. Imagine going into Westfield in Shepherds Bush and being knocked down by a rolling tumbleweed outside four boarded-up shops? It could happen.

But what of you and your pension? The typical pension fund's allocation to commercial property has risen from 5% in 2000 to over 10% now. Institutional investors have about £11 trillion sunk into the asset class.Up until this year the combination of reliable rental income and capital appreciation has meant that commercial property has successfully given investors annual returns of more than 7%.

But that is not all, there is a growing trend for the demand for shops and malls to be replaced by (much more affordable) out-of-town warehouse space from which distributions of goods can be made, following online orders. Not going out with our friends has meant staying in with our computers. Internet sales as a proportion of total retail sales grew to a staggering 32% at the end of May, from 19% at the end of February. Commercial landlords may have to face the reality that many hotels will have to transform into apartment blocks, malls may need to be reincarnated as e-commerce-fulfilment centres and offices may need fewer desks as workers dial in from home.

Mind you, change happens slowly in the commercial asset world. Leases bind the parties for tens of years and there has been the tendency to stick to what we know and change habits only very gradually. Bricks and mortar may no longer be the pension funds castle and landlords need to get on trend to survive ... soon.
Posted: 01.07.2020
Tags:  blog  newsletter

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