Around the world, landlords of all types are being asked by tenants, or even required by governments, to waive rents, grant rent holidays or write off arrears as tenants struggle to stay in business and household incomes fall or disappear. Bizarrely, real estate advisory companies are reporting that ‘rents aren’t falling’ which illustrates the odd phenomenon in 20thcentury real estate which separates ‘headline rents’ from real cashflows. Of course rental income is falling and impacting the cashflow of landlords significantly. But new lettings, along with other transactional activity, has all but ground to a halt in towns and cities across the world. This means that new prices are not being set in a world where there is no transaction record.
If the industry paid attention to net effective rents (which take into account rent holidays, fit outs and other rent incentives and voids) rather than gross ‘headline’ rents, we would hear reported an immediate and substantially downward trend in rent levels across most geographies and sectors, from retail to residential.
For most long-term landlords, painful though the cashflow implications are, rent holidays are not only equitable but also sensible. Why bankrupt an otherwise good tenant with rent demands at a time of temporary crisis from which most businesses and households will eventually recover? Evictions don’t make sense unless investors want vacant buildings or what could be a very long void period.
Covid 19 is perhaps the crisis which finishes off the Zombie companies in a way that monetary policy in the post QE age was unable to do. But most companies and households do have a long-term future from which good landlords will enjoy the benefits – if they themselves can endure these tough times now. The issue for policy makers and Treasury is whether they should help landlords in order that they help tenants. How can government ensure that good landlords continue to provide the shelter that all of us in our private and work lives need – while not bailing out bad, over-indebted, exploitative or ‘zombie’ landlords?
One solution is to make certain requirements of landlords in return for rent subsidies, guarantees or loans. This crisis presents an opportunity for clear-headed policy makers to effect changes that might have taken a decade or more to put in place were it not for this crisis.