The Covid-19 crisis has caused massive disruptions to everyday life and business.
The lockdown has left villages, towns and cities in the UK looking deserted. The high street was undergoing a slowdown, even before the health emergency so things are likely to get even worse in the near term. The government imposed policy of social distancing is likely to be with us for a few more weeks or months, but the long-term effects could cause significant problems for sectors such as the commercial property industry.
Real Estate Investment Trusts (REITs) like Intu Properties, British Land, Hammerson, Great Portland Estates and Land Securities are heavily exposed to the UK retail, hospitality, and leisure industries as their tenants operate in those areas. Leisure and hospitality have essentially been frozen on account of the health crisis. Retailers are struggling too on account of the pandemic, but the bulk of them have online operations to fall back on, which leaves the property groups in a tough position. Next has a well-established high street presence, but online revenue now exceeds in-store sales – this highlights the changes the industry has witnessed in recent years.
The share prices of REITs were in decline for a few years ahead of the UK’s EU referendum vote, and the CEOs of the firms were quick to blame the political uncertainty for the underperformance of their respective stock prices. The referendum and the result were blamed for the poor performance of the companies, but in reality, the high businesses rates and the rise of internet shopping was a big factor. According to EY, 2019 was an ‘exceptionally high’ year for UK companies issuing profit warnings, and at least one third of those warnings came from London-listed retailers. The number of retailers entering administration in 2019 dipped by 1%, according to Deloitte, but the company still described the climate as ‘challenging’. Last year the number of retailers entering company voluntary arrangements (CVAs) fell by 24%, but keep in mind there was a seven-fold increase in 2018.
In the past decade, the landscape of the British retail sector has changed a lot. Since the credit crisis, consumers have become savvier as real wage growth has been low. That prompted more people to buy online – in the same time period, technology continued to improve so it helped the pivot to e-commerce too. In the past few years, retailers have channelled more funds into growing their online operations, so it is now commonplace for those firms to derive a sizeable portion of their group revenue from the online unit.
Broadly speaking, REITs have seen falling rents on their retail outlets. The Covid-19 crisis has severely impacted an already weak sector. The lockdowns have caused footfall at retail parks to grind to zero. To make matters worse, many of the tenants have not paid their rent on time, possibly because of cash flow issues. The knock-on effect for REITs has been painful, for example, Intu Properties confirmed it only received a fraction of its rent due for the second quarter. There have been similar reports doing the rounds too.
The British government have revealed a very generous rescue scheme to ensure that businesses stay well-funded during the lockdown, so defaults and bankruptcies shouldn’t be as widespread as initially thought when the social distancing policy was first announced, but pain is likely to be inflicted nonetheless. The firms that were in a relatively vulnerable position in advance of the pandemic have arguably more to lose on account of the crisis.
In terms of share price action, Intu are the worst of a bad bunch. The stock is down roughly 88% year-to-date. Last month the company issued a dreadful update. In the second quarter it only received 29% of the rent it was owed, which was a big fall from the 77% posted in the same period last year. The firm cautioned it could be in breach of its covenants come July. Intu said it might seek to access the government’s £330 billion scheme.
Great Portland Estates’ share price is the outperformer of the sector as the stock is only down around 13% since the start of the year. In March, the firm issued a relatively positive update, all things considered. In the quarter that ended in March, the company collected 62.9% of its rent due. Keep in mind that 60% of the rent came from the retail, hospitality, and leisure sectors. The firm’s liquidity position is ‘ strong’, and the net gearing is only 14.7% - which is probably why the company isn’t under as much pressure as Intu.
Source: CMC Markets
Not all commercial property firms have direct exposure to the high-street retail industry. SEGRO specialises in warehousing – many of their clients are online retailers and they use the properties for storage. The e-commerce element sets SEGRO apart from other REITs, which helped its share price continue to set record highs until February 2020. The steady decline in footfall at shopping centres is partly because of online shopping, and it seems that SEGRO are benefitting from that indirectly. One of the long-term impacts of the Covid-19 emergency is that it will probably accelerate the transition to online shopping. Should that be the case, traditional REITs are likely to continue to underperform, while SEGRO is well positioned to take advantage of the changes in the retail industry.
Source: CMC Markets
SEGRO’s share price has enjoyed a nice rebound in the past few weeks. If it breaks above the 200-day moving average at 821.37p, it might go on to hit 878p. A pullback might encounter support at 750p.
Workspace is a property company that own and rents out office space. It is a good example of a firm that is bucking the wider negative trend in the commercial property sector as its well located offices, and flexible leases have proved popular with clients. In a similar vein to WeWork, the group pitches itself as a cool and dynamic place to work from. The rise of start-ups and office sharing feeds into the Workspace model. The government imposed lockdown has forced people to remain at home, and that has brought about a surge in remote working. Skype and Zoom meetings have become extremely popular in recent weeks as workers have had to make do with the current situation. Whenever the lockdowns are lifted, many businesses will carry on as they did before. It is possible that some companies are now questioning the need to have such expensive office space. The pandemic could pave the way for more remote working, and in turn bring about a drop-off in demand for rented offices, so Workspace might see demand slip in the medium-to-long term.
Source: CMC Markets
The Workspace share price has rebounded in the past month, and a break above 825.70p, should pave the way for further gains. A move lower from here might find support at the 600p region.
Crises tend to have a negative impact across the board, but some sectors and companies will fare better than others. According to The Office for Budget Responsibility, the UK economy could contract by up to 35% in the second-quarter. The body predicts the wholesale, retail and motor trades sectors could shrink by 50%, while the real estate sector might contract by 20%. The forecasts do not make for pleasant reading. The commercial property sector is likely to remain under pressure during the health emergency, but these challenging times are likely to set apart the men from the boys.
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