On March 25th, the day New Zealand went into lockdown, Harvey Norman sent a letter to all of its landlords refusing to pay rent while its stores were closed. This is just one example of the pain that COVID-19 is causing commercial landlords, many of whom have no rent coming in but still have to cover mortgage repayments.
Commercial tenants nationwide are struggling to pay rent, businesses are failing and landlords are being left with vacant properties. When the dust clears in a few months, the commercial property market could look very different.
Retail property may be hit particularly hard with the lockdown spurring customers to switch to online shopping. This may cause demand for retail space to fall as businesses follow their customers, improve their online selling capabilities and decrease their floor space and overheads. On the other hand, this could spur an increase in the demand for the industrial warehouse spaces businesses need to store and ship stock.
We may also see more businesses switch to remote working, spurred by the success of trials during the lockdown. This may cause demand for office property to decrease as tenants move to decrease overheads and accommodate a smaller inhouse workforce
Beyond the obvious risk of tenant default, landlords and commercial property investors will have to reckon with a number of other challenges. For one, banks may look at commercial investments as risky going forward, which could make it more difficult to secure finance or even push interest rates upward.
Landlords will also have to look closer at their leases to make sure they’re bulletproof. A common no-access clause (27.5) in many leases has meant that several tenants (including Harvey Norman) have stopped paying rent completely or substantially reduced the amount they pay. With little government assistance available, this has created a sticky situation for many landlords.
When tenants default, paying commercial mortgages may become difficult, which could put other assets on the line. A well-structured mortgage and a low-interest rate can provide some relief in periods like this so landlords should be looking at their financial arrangements to cut costs where they can.
Investment adviser and author Martin Hawes recently told Stuff that quality was more important than ever for landlords right now:
“…quality of the building, quality of the location and especially quality of the tenant.”
Because of that, Hawes says the big property firms will most likely come off much better than smaller investors who may hold properties in less prime locations, with lower quality tenants and less favourable leases.
Investors looking to buy going forward should look for properties tenanted by large businesses and government departments where possible. The stability of these tenants and the longer leases they typically prefer make for great investments in times of economic uncertainty. As grim as the outlook may seem for commercial investors, there are still opportunities as long as you’re careful when selecting a property and tenant, and protect yourself in every way possible.
On the other hand, all the pain in the commercial market may push investors into residential. Everyone needs a place to live and with working from home becoming more and more popular, small businesses may start looking at home offices instead of leasing space.
Right now, no one knows exactly what’s going to happen on the other side of this lockdown, but it’s clear that big changes are on the way for the commercial property market. If you’ve run into difficulty with your investments because of COVID-19 or if you want to protect yourself for the future, give the team of financial and mortgage advisors here at Money Empire a call to look closer at your debt and insurance and cut costs wherever possible. We’re here to help however we can so that your business can get through this difficult time and thrive when it’s all over.