Rent collection recovery rates plummet
In normal markets, a landlord would typically expect a rental recovery rate across their portfolio of around 95 per cent. However, these are far from normal times - and recovery rates have dropped to 50-70 per cent from diversified portfolios (table 1).
Occupiers are increasingly using the deferral of rents as a means to push out liabilities in an effort to retain cash for other purposes. Deferral of rents is, in effect seen as a cheap, simple and swift form of financing until fiscal and monetary stimulus packages deliver relief to businesses.
Source: Company announcements and Fidelity International 1 April 2020
Retail feels the pain
The impact on recovery rates demonstrates the significant disparity across real estate sectors. It comes as little surprise that the retail sector, with its many structural challenges, is experiencing the biggest downturn in recovery rates, historically ranging from as high 80 per cent to but now seeing lows of 10-35 per cent. This reflects the level of operational leverage employed by such businesses as they seek to remain competitive, often running with less than a few months of free cashflow.
Unfortunately, this scenario is unlikely to improve soon with footfall data highlighting the impact of different national government responses to social distancing. Countries such as Italy, Spain and France, with the strictest measures, have seen the most dramatic falls in footfall, even in essential sub sectors such as food retailing (chart 1).
Across other sectors, we are seeing better recovery rates. With their diversity of tenant industries, the office and logistics/industrial sectors are less exposed to specific risks in the same way as the retail sector. Although these are very early days, we believe this recovery rate metric could be used as an indicator of the future performance of real estate, and to assess the impact Covid-19 is having on how businesses are coping in a period of constrained cashflows.
Offering support to businesses
In this period of acute uncertainty, although most of our occupiers are able to meet their rental obligations, we are having conversations with some to provide more flexible rental payment terms. These include:
- Deferral of rents
- Shifting from quarterly to monthly rent advances
- Reduced rents
As landlords, we believe we have a responsibility and opportunity to support occupiers’ businesses during this crisis. This is being undertaken on a case-by-case basis to assess the need of each tenant and the positive impact that a temporary adjustment to rental terms might have.
A key factor for us will be assessing not merely the length of lease or creditworthiness of a business but also how sustainable the operating model of an occupier is. Real estate investors are fast having to learn that sustainability of cashflow is perhaps just as important, if not more so, than location.