The official blog of BNP Paribas Asset Management

Real estate – Can’t pay, Won’t pay!

The pandemic that has swept the globe since the end of February has resulted in an astounding change in the outlook for the economy, and consequently the world of real estate, but also in human behaviour. People are now having to adapt to a new life of lockdowns and social distancing.

The fallout is staggering: IMF predicts the economy will contract by 3% globally and 7.5% in the Netherlands. Listed real estate stocks have fallen by 29% globally. Property owners across the world are facing up to the hard reality that some tenants can’t pay, want to defer or won’t pay their rent.

Disruption, distancing and deferring

The demands for rent deferment, rent relief and rent reductions have been growing across the world, with Dutch politicians the latest to join the list focusing on the difficulties faced by tenants. Like most voices in the debate, there is little consideration for the difficulties facing property owners from rent non-payment in both the residential and commercial sectors. However, it’s an issue that has been front and centre since countries started imposing social isolation.

The effects have varied across geographies and sectors, but in the US and Europe, and in leisure and retail property in particular, the impact of growing rent arrears and debts on balance sheets has been significant. The consequences will be challenging for many companies, particularly retail property owners, with thus far, few governments offering relief.

Easing the pain?

Although it’s only a month since our previous article about the impact of the COVID-19 virus on global listed real estate markets, there’s been notable developments. Helped by massive fiscal and liquidity stimulus from governments and central banks, particularly in the US, capital markets, including real estate investment trust (REIT) markets, rallied since their March troughs and have stabilised comparatively. Global real estate stocks have risen by 27% since 23 March (in EUR). And, in parallel, the risk to rental streams has become the focus of companies, investors and, increasingly, lenders.

Governments have varied in their response. The Trump administration has announced massive stimulus at a whopping 35% of GDP. The eurozone, despite the best efforts of the ECB, will allocate a meagre 14%. However, it’s very clear at this early stage of the pandemic that the authorities are preparing the public for an extended period of disruption to social and economic life.

Logically, the difference in stimulus measures will determine the speed of the economic recovery and, ultimately, the impact on the demand for real estate. Nonetheless, as governments have encouraged businesses and individuals to discuss rent terms with their property owners, they have not assisted property owners who in some cases faced shortfalls of up to 70% of their April rent.

Bad debts and bad citizens

Rent nonpayment has caught much of the industry unawares. The information coming from publicly listed and private property owners around the world has been incomplete, but it is still revealing. 1 April was the key date for US companies: this is when property owners expect their monthly rent payment. In the US, shopping centre owners have had 50-60% of their rent, while UK retail property owners have collected around one third.

Residential property owners have been more successful, and according to those that have given updates in the US, they have lost 5-7% so far in April. Industrial property owners are expected to fare much better, but even they report that some bad actors are trying to avoid paying rent, even though they can afford to pay.

Relief in sight?

The number of retailers requesting rent deferrals, rent holidays or withholding rent will increasingly place the spotlight on the difficulties property owners have in meeting their obligations. A number of European REITs have already suspended their dividends as investors and lenders look at balance sheets and debt covenants.

However, it’s not only retail that is affected. Office property owners, which typically have longer leases, also face issues.

There are always relative winners and losers in any sector, giving investors the opportunity to choose property types, tenant exposures and balance sheets to invest in. Clearly, in a world of rent payment uncertainty, companies with weak balance sheets and tenants will have more challenges in the months ahead than those with solid finances.

Can't Pay? Won't Pay! was originally written in 1974. A political comedy, it is one of Dario Fo's most famous plays about consumer backlash against high prices at the time of the oil crisis. He re-wrote it to capture the impact of the financial crisis on society in 2008/2009.

Perhaps if he were still alive, he would be considering another re-write as the latest global crisis affects both human and business behaviour as well as the wider economy.

Written 17 April 2020

Other columns by Shaun Stevens

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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