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Covid-19 crisis may leave deep scars on property investors

Even after it subsides, retailers will still be dealing with the damage inflicted by the shift to online shopping

Covid-19 has amplified retailers' woes. Topshop owner Arcadia, for instance, was already dealing with the shift to online shopping and debt-laden balance sheets.

ASKING for a rent cut when cash flow is tight can be an awkward conversation. Not so in Europe, where retailers are increasingly asking landlords for reductions so they can cope with the fallout from the novel coronavirus.

Weaker chains have formed for such demands, but behind the scenes, healthier businesses are also asking for lower, more flexible rents.

The risk is that even as the global economy recovers, these companies are not able to come off such support.

British department store Debenhams was ahead of the pack.

The ailing business, which had already agreed to a restructuring with its landlords, has now asked for a five-month rent holiday so it can manage the impact of the outbreak of the novel coronavirus, TheFinancial Times reported.

The request is in addition to an existing plea for reductions in rent and business rates tied to a planned balance sheet restructuring that could involve converting at least £100 million (S$172.8 million) of debt into equity.

Casual-dining chain Carluccio's asked for a similar rent break on Sunday.

The virus has amplified retailers' woes. Many like Topshop owner Arcadia were already struggling with the shift to online shopping and debt-laden balance sheets.

The pandemic has now forced store closures across France, Spain and Italy. Even healthy ones are asking for similar rent holidays or for these payments to be linked to sales, an analyst said.

The logic is simple. Rent costs could quickly become unaffordable if companies are not able to do business.

For example, H&M, which has not yet asked landlords for new rent terms, paid US$2.4 billion in rent in 2018.

This is more bad news for property landlords.

Intu Properties, an owner of shopping malls in the UK and Spain, was forced to abandon plans to raise rescue-equity earlier this month, having shown that occupancy rates were declining.

Unibail-Rodamco-Westfield, a global retail property landlord, shelved plans to build a £1 billion shopping centre in Croydon, a suburb of London.

Given the lack of alternative demand, landlords have little choice but to agree to lower rents.

The question is whether lower, more flexible rents are temporary or permanent. Retailers have no idea when the virus crisis will end.

Even after it subsides, many will still be grappling with damage inflicted by online shopping, which reduces the need for physical stores.

Once landlords have agreed to lower rents or to tie payments to sales, it will be hard for them to ever go back to the previous arrangement.

The Stoxx Europe 600 Real Estate Index has lost 35 per cent of its value since the beginning of the year. Any recovery will likely be very slow. BLOOMBERG