Hold or fold? How can Landlords support Tenants in a time of need?

Just in the last 24 hours or so we've seen a flurry of public and private questions being asked about how to mitigate cost to business and individuals to keep the economy alive. The challenges to Landlords/Tenants are remarkably similar in both residential and commercial markets - how to keep credit worthy tenants afloat when ability to pay cash is impaired in the short term;

• Carluccio's - first restaurant chain to ask for rent payment holiday, but won't be the last
• Dixon Carphone - announcing the closure of their complete UK branch network, apparently unrelated, but resulting in 2,900 jobs at risk
• Laura Ashley - being placed into administration due to trading conditions, despite recent uptick in revenues
• Mountain Warehouse - Reporting daily sales down 40% year on year, before the recent UK restrictions came into effect
• Catman Boogie Music & Entertainments - reports terminating the lease on their community music studio due to collapsing revenues from their booking agency business
• The country of Spain - Mortgage payments suspended for anyone affected
• A number of corporate occupiers exploring what/if they can do to rapidly reduce real estate costs in the short term to mitigate tumbling revenues

The list goes on, but clearly retail, hospitality, entertainment, travel and social enterprise are those in immediate need of assistance.

The long term impact of any form of rent holiday to a Landlord is minimal, yet has a massive impact on the Tenant. A short term rent-free period or deferral of rent will have, in the scheme of things, a marginal impact on asset values, because they are based on the quality of the asset and underlying financial strength of the Tenant. Neither of these have fundamentally changed because of COVID-19, albeit that superficial financial strength may have. In contrast the rent payment might represent up to 30% of the fixed costs of a business or individual monthly income, at a time when revenues are tumbling or wages lost through furlough or lay-off.

That's not to say a rent holiday will be easy to stomach for Landlords. Cashflow is as important as any other business; deteriorating capital values impact debt covenants (Intu is already stated it is at risk), and cash is still required to repay debt and run the company. Hence supporting Tenants through mitigation measures merely shifts the challenge to a smaller group of businesses (Landlords), who may have to seek similar respite from their lenders or backers unless pockets are deep / goodwill in abundance

There seem to be two ways to tackle this challenge, both of need government intervention and financial support;

• Bundle the challenge of real estate costs in with wider salary cost challenges, especially for retail, hospitality and travel industry businesses where income has flatlined, and provide relief at the Tenant / Company level
• Provide wholesale financial/market level support to Landlords (mortgage payment holidays, deferred/waived interest payments etc) who can demonstrate that they are providing flow-through relief to Tenants

Non-real estate relief mechanisms are of course available, but beyond my thoughts right now.

Given the relative simplicity / lower cost of providing this support through Landlords as opposed to Tenants, direction of travel here seems clear. It can also be applied in similar fashion to both residential and commercial markets, helping keep both businesses and workers afloat in these difficult times. I'm watching closely to see the government response...

Views are my own