WHAT’S NEW- When COVID-19 hit, the UK government introduced a ‘rent holiday’ which allowed renters of commercial property (such as restaurants, shops, offices) to not pay their rent and not get evicted until 30 September 2020. There remains considerable uncertainty as to whether this measure will be extended. 30% of landlords are reported to be considering evictions as of October 1 , and there are increased talks of landlords looking to claim full back-rents for the previous few months, a situation that could be untenable for many tenants.
OUR TAKE - With the fourth quarter rents due next week, we will find out shortly in what state this non-residential segment of the market is. As a reminder, last quarter, UK companies British Land and Land Securities reported a relatively healthy 85% collection rate for offices but only around 30% for retail. We have expressed caution for some time on prospects for high street retail as that segment faces stiff competition from the digitalisation of retail. We are also cautious on prospects for the office segment given the profound changes brought by the move to working from home which COVID-19 has brought. Companies have started reducing their office space, are renegotiating rents, a trend we expect to continue for the foreseeable future.
WHAT’S NEXT - Valuations may look cheap in several parts of real estate markets, but we think the discounts are justified given the negative long-term prospects for the bulk of the sector. Large discounts to book values are telling us that there could be financial distress round the corner, particularly if COVID-19’s second wave leads governments to reinstate social distancing measures which prevent consumer behaviour from normalising. Clearly it is not all doom and gloom within property, as we find pockets of value in the sector, such as student property, elderly homes and parts of industrials - such as logistics - which we expect to benefit from the cyclical recovery.