An Awakening for Landlords
As students, we are extremely familiar with the hassle of trying to get the landlords of our rented accommodation to reduce our rental payments during the Covid-19 pandemic. The end result depends on the individual landlord, and while some of us have found success, many students have been left trying to find contractual loopholes that would exempt us from paying rent.
Similarly, retailers and tenants in the hospitality sector have been struggling to keep up with fixed rental payments over the past couple of months. In-store retail and hospitality revenues have been devastated by social distancing measures and travel restrictions, that have ultimately reduced the number of consumers who can enter a shop or venue at any one time, and scared many customers away from public places. With many retailers unable to pay rent, property investors are currently in a compromising position which may see them share some of the losses. Historically, landlords have always had the upper hand in rent negotiations, but, since the outbreak of the novel coronavirus, retailers across the globe have been urging landlords for some form of relief. Many of our favourite shops and restaurants have been forced to permanently close their doors to customers, while some more lenient landlords have agreed to negotiate lease agreements to secure their income streams.
For example, the owner of London hotspot, Covent Garden, Capital & Counties Properties PLC, has offered variable lease agreements until the end of the year after only collecting 27 per cent of rent owed on the 24th June from tenants. These variable turnover lease agreements operate by charging a higher rate of rent to tenants who record higher store revenues. As such, this flexibility will surely benefit many restaurants, retailers, cafes, and independent businesses, and allow them to stay afloat during this post-pandemic recovery phase.
Having said this, the willingness of landlords and property companies to offer variable lease agreements is not exactly sky-high. Why? Well, let’s use U.S. shopping mall owner, Simon Property Group, as an example. The company found that it generated five times more income from fixed lease agreements than from variable leases.
The property investment sector will certainly need some time to recover. Hammerson, a shopping centre operator, has witnessed an 80 percent fall in its share price since the outbreak of the pandemic. Hammerson owns many shopping malls including the Bullring in Birmingham, Brent Cross and Victoria Gate. The mall operator is now looking for a cash injection of £600m to compensate for the fall in rents, valuations and suffering of the retail sector. Hammerson is raising equity through the sale of its 50 percent stake in VIA Outlets, a European shopping outlet business. VIA Outlets was once valued at $1bn, but analysts estimate that the value has plummeted closer to around $400m.
However, it is not all gloom and doom for the property market. Smaller buy-to-let investors are benefiting from stamp duty reductions introduced by the Chancellor Rishi Sunak on July 8th. This new measure raises the threshold for home owners paying stamp duty from £125,000 to £500,000 until March 2021.
What is Stamp Duty?
Stamp duty land tax is a type of tax that you must pay when buying a residential property or land in England and Northern Ireland. As this is applicable to buy-to-let investors, they can benefit from expanding their portfolio. For example, my student accommodation letting company previously would have had to pay stamp duty for a house purchase valued above £125,000. However, the new measure means that they will only pay the tax on houses worth over £500,000 – which, in this example, would be an extremely luxurious student house! Now, buy-to-let investors can save on stamp duty, and take advantage of paying lower interest on mortgages.
Rishi Sunak’s announcement had an upwards effect on house prices, which rose 1.7 per cent on average in July compared with the previous month. Analysts wonder if this will pave the way towards a long-term recovery in the housing market, or whether house prices will depreciate given the lingering uncertainty regarding employment prospects.
Overall, property investors who have had stable and secure incomes for many years through rental payments are seeing transformations in the property market, where demand and wealth from owning land may never return to pre-crisis levels. Income recovery will depend on the duration of the coronavirus pandemic, as well as the intensity of its lasting effects. The question remains - is it wise to invest in retail property going forward, in a time when offices are operating at a massively reduced capacity, regular shopaholics are increasingly doing their shopping online, and groceries and meals can be delivered straight to your doorstep? Or, will customers and workers flock back to the big cities quicker than analysts have presumed? What do you think? It would be great to hear your opinion below in the comments section!