Social distancing, working from home, travel bans and enforced and advisory closures have decimated incomes for retail, F&B and leisure tenants across Europe. It could be investors who are left picking up the bill, writes Mark Faithfull
The coronavirus pandemic continues to close Europe’s non-food/pharmacy shops, bars, restaurants, theatres, cinemas and nightclubs as shopping centres and high streets hunker down to the bare essentials. With margins already tight and cash flow precarious in a sector where many businesses were already suffering from a drop in footfall, struggling fashion chain Laura Ashley became the first direct victim as it went into administration.
Embattled real estate landlords will be expected to play a key role, providing vital support for tenants in the form of rent deferrals or cuts but many have their own cash-flow issues and rely on the rental income they receive to service loan repayments. Pre-health crisis results from real estate investment trust Hammerson and a debt black hole at Intu provided a stark illustration of just how challenging general market conditions have become.
New investors have become wary of financing retail real estate and while many shopping-based destinations have diversified into the stronger-performing leisure and food-and-beverage categories, these have been as equally hard hit by the coronavirus.
In the UK, Revo chief executive Ed Cooke has written to the Chancellor asking for financial aid for landlords. Without government intervention, it is investors who will have to pick up the tab and not all may be willing to pour more money into shopping centre portfolios.
“Covid-19 is an evolving scenario with varied economic impacts, depending on country, market, and sector,” says Fergus Hicks, real estate strategist at UBS Asset Management and author of a new report. “It is impossible to say what the exact downgrade to GDP growth—and therefore real estate demand—will be. However, it is clear that occupier demand will be negatively affected, most significantly in retail, leisure and hotels, as movement is restricted, and consumer confidence dented.”
According to the UBS report, recession is on the horizon in 2020 for most European countries, even if virus containment is achieved within the next couple of months. In what UBS describes as a “contained virus scenario”, the already-challenged retail sector will underperform, as will the tourism-dependent hotel sector.
For now, Andrew Weir, global head of asset management and global chair of real estate and construction at KPMG, advises real estate landlords and investors to “assemble a crisis-management team that’s well equipped to demonstrate strong leadership and maintain business stability in these unpredictable times”.
He says: “Make sure that the leadership remains visible, accessible and that there is ongoing communication with employees, customers and stakeholders.”