Will lenders be sympathetic to the plight of property companies?

As another week of lockdown comes to an end, property companies continue to update the market on the impact on their businesses.

The latest slew of rent collection updates reveal that it isn’t just the retail, leisure and hospitality sectors that have been hit.

Almost all companies have seen an impact on income (apart from the healthcare property companies where income is backed by the government and Supermarket Income REIT – see our real estate monthly roundup for March for more details).

Industrial and logistics giant SEGRO revealed last Thursday that 71% of rent due had been paid, down from 96% last year. Office landlords have also been affected. Great Portland Estates revealed that it had received 62.9% of quarterly rent due, down from 99% a year ago.

One of the hardest hit sectors (aside from retail, leisure and hospitality), however, is the serviced office sector.

Flexible office provider Workspace collected just 50% of rent for the quarter and said it expects a significantly lower level of cash rental income in the short term.

Its 3,000 business tenants are largely SMEs and are reliant on Workspace providing a lot of the infrastructure (such as super-fast broadband) to function. It could be that a lot of SMEs don’t make it through this period without this vital (and costly) infrastructure.

Workspace, and most property companies, have no choice but to offer rental concessions to tenants to preserve occupancy levels. The fact is that if it pursued the rent, most of its tenants would likely go under leaving it with huge voids in its properties.

That is the trade-off that a lot of property landlords are wrestling with at the moment. Most are being sympathetic to the plight of their tenants.

But as the cash flow issue is passed on to the landlord will their lenders be as sympathetic to them?

Reduced cash flows from property portfolios will potentially impact their ability to meet interest payments, many of which are due in mid-April. Those landlords will likely be requesting flexibility from their lenders, as interest coverage ratios and loan-to-value (LTV) covenants terms come under pressure.

There have been calls for the government to step in and provide guidance to lenders to grant flexibility. As yet there has been stony silence on the matter from the banks but some lenders have indicated to property finance magazine Real Estate Capital that they favour a “collaborative approach to dealing with difficulties faced by borrowers”.

Property companies will certainly be hoping it is the approach of the banks, especially as pressure is put on values and LTV covenants come closer and closer to being breached.

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