Prupim has answered calls from retailers to allow them to switch from quarterly to monthly rents to free up cash. Supporting tenants in this way makes sense for investors, says John Duxbury
John Duxbury is director of retail asset management at Prupim
Landlords are seldom loved. So it was a relatively unusual occurrence when in January Prudential Property Investment Managers (Prupim) attracted favourable comment for becoming the first major UK landlord to invite retail tenants to make rent payments monthly, rather than quarterly. This initiative may come as a surprise to investment purists so I would like to explain why we undertook this unusual step.
To fulfil the long term needs of the investor for attractive property investment returns the asset manager must be an intermediary between the investor and the occupier customer.
Most asset managers will have a good understanding of the investor's needs but understanding the occupier's interests is a key requirement for maintaining income and cash flow from properties to supplement the returns from yield movement.
The issue of retail rents in the current climate is a case in point. The timing of the collection of these rents has been a bone of contention for some time. In the sharply deteriorating economic climate of the last six months, a number of well-known retailers felt that quarterly rent collections hindered their cash flow, and threatened livelihoods.
In November, Prupim partnered with other commercial landlords to allow small retail businesses to pay rents on a monthly basis, following debate on the issue throughout much of 2008. Subsequently, Prupim became the first landlord to allow most retailers to opt to pay rent 12 times a year, without any surcharge or administration fee.
To date, the reaction to the move, which applies for 12 months from March this year, has been positive. Prupim is seen as far-sighted, customer-aware and prepared to take bold steps in responding to the difficulties facing the sector.
We recognise that retailer cash flows are under immense pressure due to the current extraordinary restrictions on bank finance. It is the nature of the retail sector that cash flows are particularly asymmetrical - even in the good times - so smoothing cash flow greatly assists them.
We are also aware that losing retailers creates voids, which lead to negative cash flows at a time when letting units is challenging. If the new policy helps viable retail businesses, it is likely to benefit fund investors.
Some have questioned Prupim's motives for making what they see as a one-sided concession. We do not see it that way. We were receiving numerous requests from different retailers for assistance in the current poor trading climate and these requests were taking different forms.
Some wanted to pay rent monthly while others asked for different payment schedules and even rent-free periods. This encouraged us to look for a single policy response, since we felt that a response should not discriminate between failing retailers and those that were successful but still finding trading conditions extremely tough.
Ultimately, Prupim's philosophy is that understanding the markets tenants operate in, listening to tenants and reacting to their needs will drive improved long-term investment performance. This move is intended to support that philosophy and is entirely in keeping with our business objective of making money for our client funds.
The policy will allow us to preserve the stability of our occupier base in the retail sector, where rent is a large slice of retailers' overheads. It is a temporary move which will provide relief for retailers in the short term and, by reducing voids, will be advantageous for landlords and client funds in the long term.
We also take the view that we will be alerted earlier to problems with a tenant's financial status if we are monitoring income receipts on a monthly in advance rather than quarterly schedule. This will enable us to react promptly to protect the client's position.
Although the initiative will have a marginal financial cost, it is modest over the short term For our client funds, there is a small time value of money sacrifice. However, interest rates are so low that this is less of an issue than the cost in terms of increased rent collection administration, which is incurred by Prupim and not by our clients.
This is why we are insisting, as a condition, that monthly rents are paid electronically on the due date by BACS or standing order. The bottom line is that there are sound investment reasons why this is a sensible strategy, to contain void levels and improve rent collection performance.
There are also less tangible investment benefits. Having a greater dialogue with tenants reflects well on us, and we are able to sell better customer relationships as part of the offer. This is not always the case. As I mentioned earlier, landlords are rarely loved. We will still negotiate in the best interests of our clients.
We will often disagree on issues and sometimes we will have to make difficult choices. But our tenants already know and value our pragmatism and in future, when the market recovers (and it will!) there will be intangible brand benefits for us.
This is reflected in other areas. For example, we are also looking closely at our service charge budgets to ensure that we do not add to the burden of retailers. Some types of retailer, including supermarket, bank, building society, utility or local authority occupiers, are not eligible for the switch to monthly rent payments. We have also made it clear that normally we would seek compensation for loss of interest in receiving rents monthly but that, in the current climate, we would not be doing so.
It remains to be seen whether our temporary initiative will be followed by other commercial landlords. We know that some would like to do so but are constrained by their own debt position and covenants with their bankers.
The UK is now officially in a recession which may be the worst for many of our lifetimes. Deteriorating trading conditions in the high street and beyond have demanded new thinking. We hope and believe that this move helps identify ways of providing support to the retail sector, while safeguarding the returns for participating funds.