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The challenge for commercial landlords amid COVID-19

Property investors and commercial landlords want and need tenants who will respect and occupy their units while paying the agreed rent on time. That’s a fact. If one tenant leaves, they maintain their investment — generally safe in the knowledge that the perfect tenant is only an enquiry away. Before March 2020, property investors had approached the government for more support — referencing things like stamp duty surcharges and tax relief changes to buy-to-let mortgages. But the government felt that landlords were in a good place. Interest rates remained at a record low and in most respects, the market was healthy and didn’t require incentives.

Changing landscape

Through circumstances beyond their control, landlords have seen a dramatic change in their investment landscape. Even before the pandemic, town centres had entered uncertain times with a customer shift in shopping habits – opting for the online buying experience in preference to physically visiting retail outlets.

The pressure mounted on some longstanding tenants who were finding it difficult to stay afloat against a backdrop of declining footfall. Some had no option but to give notice and hand back their keys. And just as the landlord’s search for a new occupant was about to begin, COVID-19 changed everything. Retail, leisure and general commerce – it all fell silent.

Government support

At local government level, everyone’s attention, efforts and funding were focused on tackling the pandemic. Initiatives to boost town centre trade, investment and commercial expansion were put on ice. Even dramatically reducing rental prices (by at least 10% on average) seems to have gone unnoticed and unappreciated.

As we come to the end of the government’s COVID-19 support programme, the financial position of many property investors could be stretched to the limit. The end of the furlough scheme is a huge unknown. Running for more than 18 months — at the cost of some £66 billion — it has protected 11 million jobs. But how many of these jobs will continue to be viable remains to be seen. Loan schemes must be paid back and the loss of furlough payments for staff could hit hard. Most tenants are now more likely to reduce commercial floor space than consider plans to expand.

Potential solution: Change of use?

For property investors with unoccupied units, their prospects look bleak, but if they haven’t considered it already, a change of use may be an option. Local authorities could be amenable to a shift in usage from retail or office to housing, but how long will it take from start to finish? And can the investor wait?

Unlike during the financial crash of 2008, the banking sector should be supportive. If there’s significant capital in place, they’ll hopefully be patient and favourable to development plans for houses or flats if they are kept informed and the loan repayments are made when due. However, during the COVID-19 crisis, many public sector services had difficulty processing applications quickly, and anything non-standard might take longer or fall into the ‘too difficult’ pile. Meanwhile, pressure builds. Loan holidays and low-interest rates have helped, but lack of income and difficult cash flow starts to tell.

Potential solution: Complete rebuild?

Selling an unoccupied, older building without planning permission is equally unattractive to other investors, so the prospect of an early sale is diminished. Demolishing the structure might be affordable but also eats into capital. Currently, when considering a rebuild, you must factor in the recent 26% rise in construction materials and general UK shortages. Not to mention the 20% increase in labour costs – all of which will inflate the budget, prolong completion, and potentially make it unfeasible. Perhaps selling the land for long-term housing development is the best solution, but that’s also fraught with risk. Housebuilders are not known for their speedy purchasing and offers often include caveats and easy ‘get outs’.

Potential solution: Damage by design?

Most investors will re-double efforts to market their property in an honest effort to secure another reliable and longstanding tenant. However, for the unscrupulous but significant few, a fire (or even a burst pipe) — that’s designed to ravage the building, making demolition and site clearance inevitable — becomes a risk they are prepared to take.

Sedgwick is well positioned to uncover these events for our insurer clients and conduct a fair and responsible enquiry to detect any prevailing motive and establish cause. AI technology also helps us understand in greater depth those trends and activities of interest in subjects such as commercial fires, which is invaluable. As we enter winter 2021 and into something of an unchartered fiscal waters, we must ensure that customers with genuine claims are not disadvantaged by those who think they can depend on their insurance policy for a wholly illegal, financial fix.

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