- The cascading effect of the pandemic hits the commercial property industry with falling rents
- A majority of retail companies facing severe financial crunch
- The unlocking of the British economy presents a case for a quick turnaround
The commercial property industry of the United Kingdom has just received a huge shock in the form of a sharp fall in rent receipts for the quarter ending June 2020. Though it was known that the impact of the coronavirus pandemic would hit them at some point in time, but nothing can prepare you for a shock of this magnitude. The industry which was due to receive a rental revenue of nearly £2.5 billion during the second quarter of this year has actually got merely 14 per cent of the value till now. The retail sector has been so badly hit by the lockdown, that it saw a very drastic fall in the mall footfalls, which crashed its revenues acutely and in fact some of these companies were pushed to the brink of a bankruptcy. It is though worth noting that several retailers have reopened their shops and the situation has started to improve gradually since May. It is expected that their financial condition improves slowly in the coming few months.
Till the end of March when the lockdown was not in place, the rental income of landlords and commercial property letting companies was healthy as most of their tenants had witnessed good business during the first quarter of the year. But the lockdown impacted the commercial property industry. Most property businesses who have to bear operations & maintenance cost, have fallen back on the government stimulus measures, putting a significant number of their employees under furlough. However, as the next rent payments are not due till the last week of September, they would continue to be under financial stress for another three months despite the government’s plan to completely open the economy beginning July 4 this year.
The fortunes of the commercial property industry depend to a large extent on the retail industry. The retail industry, with its large source of cash income, provides the best revenue potential for the commercial property industry. Retailing has, in the recent past, gone through a lot of change. The industry where footfall was once considered as the benchmark for success has now been swarmed by hundreds of online retail companies who do not need to rent shop floors to sell their merchandise. This has prompted many traditional shop floor retail companies to also open online portals and reduce their dependence on their retail stores. During the outbreak of the pandemic and the resultant lockdown, the importance of online retailing was much more accentuated. While most of the citizens in the country were locked up in their homes because of the governments directive, online retailers were hard at work, keeping them provisioned. Most of the people found it convenient to order food and other essential items to be delivered at their doorsteps while utmost precaution was being taken to ensure safety and sanitization in handling those commodities. During the period of the lockdown, the online retail industry witnessed a phenomenal growth while their shop floor cousins were losing market share and were deeply in the red. Even after the lockdown has been opened, the retail stores are very slow to pick up business as the government has imposed strict social distancing measures that are dissuading many people from visiting stores.
The recent decision of the government to completely throw open the economy might bring back some cheer to the ailing retail industry. During the first two phases of the opening up, not much spike in the viral infection was witnesses, which has prompted the government to relax some of the social distancing measures during the third phase of the reopening on the 4th of July. It remains to be seen, however, if any growth momentum takes place in the retail industry after that, which could have a bearing on the prospects of the commercial property industry’s rental income.
Let us now take a closer look at a leading real estate investment trust in the UK, Intu Properties Plc.
Intu Properties Plc (LON:INTU)
Intu properties Plc is a British REIT (Real Estate Investment Trust) firm that owns and manages high profile commercial real estate properties in the United Kingdom and in Spain. The company’s properties are some of the most popular shopping centers in these countries with seventeen in the United Kingdom and one in Spain. Its clientele are amongst the most popular fashion and retailing brands in the world namely Harrods, Zara, H Beauty and Ali express. The shares of the company are constituents of the FTSE All Share index on the London Stock Exchange, where they are identified with the ticker name INTU.
Even before the pandemic hit the shores, Intu properties had been in deep financial trouble. Till January 2020 the company had been facing a challenging market environment due to the negative headwinds emanating out of the pre-Brexit jittery. Many of its customers were delaying their decisions and waiting for the business environment to improve before renting out shops. In the year 2019, the company had suffered a loss of £2 billion, and currently, it has a debt burden of £5 billion on its books, which is up for maturity by early 2021 and needs urgent refinancing.
Since the lockdown was imposed, the company did receive some government support in the form of various stimulus spending made by the latter to support businesses in the country. Intu was able to place nearly 60 per cent of its shopping centre staff and 20 per cent of its head office staff under the benefit of that scheme. However, it has not been able to avail of the government loan facility to fulfil its debt obligations, which is the reason why it is seeking fresh lender support. Currently, the company is in discussions with its lenders to allow a moratorium period of 15 to 18 months from the repayment of capital and interest. Whether the company will fall into administration or not is highly contingent on these discussions.
The company stock traded at Price GBX 1.75, down by 55.19 percent on June 26 at 3.53 pm. Its 52 week range low / high rage was recorded at 3.76 / 81.78. It had a market capitalization of 52.98 million pounds with a negative EPS of (1.45).
The UK commercial property industry has been hit by high revenue losses, with retailers unable to pay rents for Q2 2020. It is well known that the British commercial properties in London are some of the most exorbitantly priced realty spaces around the world, and so may be able to bear these rental losses to a considerable extent. As far as the case of Intu properties is concerned, it had been in financial troubles even before the pandemic had hit United Kingdom. The 15 to 18 months repayment moratorium it is asking from its lenders in the pretext of the lockdown hit, if approved, could breathe in a new lease of life into it.