Real estate investment in Covid-19 times – a trustee’s perspective
Trustees of real estate portfolios have faced, and continue to face, a number of challenges in 2020. Here, Laura Brown and Peter Marsh - Client Services Directors, provide a trustee’s view of the impact of the global pandemic on commercial and residential real estate.
In recent months, trustees of residential property structures have had to adapt their expectations and take a longer term view of their investments. One driver for this is residential tenants, particularly at the lower end of the market, struggling to maintain rental payments, perhaps due to being placed on furlough or receiving reduced income. As a result, trustees have had to work hard to ensure the continued occupancy of properties held in their structures; often meaning working closely with property managers and tenants to approve rent concessions, including rent free periods and/or temporary rent reductions.
While a short term loss of rental income is a hit to a trustee, priorities have had to change to a focus on assisting tenants through these difficult and unprecedented times. Trustees must however remain vigilant to their duties and ensure that any flexible agreements are documented by way of side letters.
Despite the challenges, trustees are actually finding themselves managing more real estate structures as the popularity of this asset class is increasing. There is no denying that the introduction of the stamp duty holiday (which cut the rate of stamp duty to zero per cent for properties £500,000 or under until 31 March 2021) has contributed to this thanks to the considerable savings to be had by buyers before the deadline. This saving, alongside a low interest rate environment and cheap borrowing costs for buyers is responsible for the intensified demand.
Of particular note, Prime Central London property (PCL) is showing its resilience in the face of these adverse conditions. London has maintained its safe haven status for the international wealthy and despite Brexit, has remained a strong global financial centre and a place where international families want to send their children for the quality of education that the UK has to offer.
When considering commercial property, we are also seeing a number of challenges. Many businesses have been forced to cease trading during lockdown resulting in numerous requests for financial support from landlords/trustees by way of significant reductions in rent, rent free holidays and payment plans for arrears. Landlords are also seeing an increasing number of requests from their tenants to downsize their office space due to the success of working from home. As a result, sub-tenancy and repositioning opportunities are arising. This is on top of the costs involved with ensuring commercial premises are Covid-19 compliant and workplace ready. The pressure is on the trustee to ensure that the real estate investment is managed in the most appropriate way for all parties involved.
It is a similar story for the retail market. Many tenants are not paying rent or entering into company voluntary arrangements, leaving a plethora of empty units which is becoming more noticeable on the high streets. There have been approximately 750,000 job losses in the UK since Covid-19; the retail sector contributing significantly to this number. With a high proportion of home working, footfall on the UK’s high streets has reduced significantly as shoppers move online. Consequently, retail landlords should be braced for rents to be determined as a percentage of turnover and many existing rental agreements may have to be rebased. This should be seen as a real opportunity for trustees/landlords to extend their tenancy terms in exchange for some rent concessions.
In more positive news, affluent high street locations have been insulated from the impact more than city centres as fewer people have been travelling into cities for work/leisure, instead preferring to stay local. This may well trigger a re-emergence of the local high street as a shopping destination and trustees may consequently see a rise in high street commercial real-estate investment opportunities.
While 2020 has been an extremely difficult year for trustees holding real estate assets there are still numerous opportunities that should be explored with a longer term view post Covid-19. As always, trustees must ensure that decisions around properties held within their trust structures are fully considered and documented.
To discuss this further, contact the authors Laura Brown or Peter Marsh, or any of our global Real Estate experts.
This article is a summary of the subject and is provided for information only. It does not purport to give specific legal or tax planning advice; and before acting, further advice should be sought. Whilst this article has been carefully prepared, neither the authors nor Equiom shall be liable for any errors, misprint or misinterpretation of any of the matters set out in it.
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