It’s been almost a year since the coronavirus pandemic was declared and, despite the good news of the vaccine programme being rolled out, the UK is currently in its third period of various lockdown restrictions following the emergence of a new and more transmissible virus. The current government restrictions, which are expected to last until the spring, have impacted businesses' revenues in almost every sector, and many are now struggling to fulfil their lease obligations. For businesses, leases are often the biggest expenses on their balance sheets, and it has become difficult for them to many too make lease payments when they were generating little or no income over a prolonged period of time – and this has a significant knock-on impact on landlords, owners and investors.
According to anonymised 2020 data from over 150,000 live leases managed through MRI Software’s enterprise property management and accounting software revealed that during the pandemic, the proportion of outstanding rent payments in the commercial sector (retail, shopping malls, logistics, warehouses and office spaces) surged. In March, when the UK government introduced the first period of nationwide lockdown, the proportion of outstanding rent payments in the commercial sector increased from 19% of the total rent invoiced to 33% in September – peaking at a total of 58% in October (£204 million left unpaid across the Horizon database).
But the news isn’t all bad, and there are positive takeaways in that both commercial landlords and tenants are working together to adopt flexible leasing arrangements and are cooperating to help ensure the ongoing viability and success of UK businesses. From March through June 2020, there were 30% more rent reductions than during the same period in 2019. This shows that many landlords are cooperating with tenants to get through the crisis. The number of rent reductions increased by 46% in March, 82% in April, 27% in May and 11% in June compared to the same months in 2019.
The data also revealed the average terms of new leases were 52 months between March to June, which decreased from 69 months for the same period the previous year. The reality is that restrictions will outlast the official lockdown, landlords will need to devise strategies that help them stay the course despite the challenges impacting them today and ensure business continuity is maintained when conditions shift dramatically due to any unforeseen hurdles in a post-Coronavirus world.
Landlords need to find alternative ways to ensure their portfolio's financial viability, and for many, the answer will be diversification. By evaluating the impact of the crisis on property portfolios, and understanding where adjustments are required, landlords can find new opportunities to explore. Previous research from MRI had shown that, before the pandemic, two-thirds of property professionals believed that former retail premises could be the UK’s biggest untapped resource for new residential development. New avenues for diversification, such as turning commercial spaces into campus-style redevelopments that combine retail, space as a service and Build-to-Rent, student accommodation, and senior living, represent an exciting and highly lucrative opportunity forward-thinking building owners are well placed to capitalise on. But standing still would allow others to transform tomorrow’s commercial property market - letting a great opportunity slip through their fingers.
The global health crisis has shone a light on the need for property management to embrace connected digital solutions. By leveraging PropTech and the decisive, data-driven insights it provides, landlords can put in place strategies that allow them to achieve strategic goals and overall business objectives, ensuring they can navigate today’s challenges from the health crisis and succeed in the new world of commercial property and the challenges not yet on the horizon that come with it.
