COMMERCIAL PROPERTY, SALES & LEASINGCORONAVIRUS COVID-19 PANDEMIC

Tenancy code extension threatens viability of property companies

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THE extension of commercial leasing code of conduct will cost small and medium sized commercial property landlords – disproportionately shouldering the economic burden from COVID-19 – about $14.9 billion, according to Deloitte Access Economics.

Deloitte Access Economics’ analysis prepared for the Property Council of Australia shows that for the five months period from April to September, the code has hit commercial landlord revenues by at least $4 billion.

The report said this will increase to $8.8 billion if the code is extended to March next year, equating to an estimated 10% fall in annual industry revenue.

However, in reality landlords have provided rent relief to many businesses not covered by framework mandated by the code in April 2020.

When these additional rental waivers are taken into account, the cost to commercial landlords over the five month period from April to September is estimated at $6.8 billion, rising to $14.9 billion over an 11 month period, or a 17% fall in annual revenue.

To put into perspective, the $14.9 billion cost to property landlords represents around 33% of the $45 billion state and territory governments have committed in response to COVID-19 – which is just over 2% of their gross state product, compared to $314 billion by the federal government.

Property Council chief executive Ken Morrison said no other sector of the Australian economy has disproportionately shouldered the cost of recovery, comparing the property industry to the banks which unlike property owners, have not provided a waiver, only repayment deferrals without interest-free periods.

“The code was an extraordinary intervention in the extraordinary circumstances where businesses were being forced to close under government direction to stop the spread of COVID-19.

“While the code may have been justified during the extraordinary time in which it was conceived, it involves one part of the business community, many of them small owners, being legally obligated to give money to another part of the business community,” he added.

Morrison’s comments echo Vicinity Centre’s CEO Grant Kelley who last week said property remains one of the few industries that is providing waivers, not only deferrals, of rent to impacted businesses, notwithstanding legal obligations under leases.

“We have been negotiating in good faith with both our SME and non-SME retailers who have been impacted by COVID-19 to ‘share the burden’ and support them through these difficult times while balancing the need to secure future cash flows for Vicinity.

“Of the short-term lease variations agreed to date, 86% of the rent relief has been in the form of waivers and 14% deferrals. Where lease extensions have been agreed as part of negotiations, leases have been extended by 17 months on average.” Kelley said as Australia’s second largest shopping centre owner posted a $1.8 billion full year loss.

Morrison warned against extending the code.

“The code is unlike any government measure enacted on one sector of the economy in modern Australian history. No other advanced economies around the world have made a single sector disproportionately shoulder the cost of recovery.

“No other sector of the Australian economy has faced a similar demand to waive legally incurred obligations. By contrast, the only other sector asked to assist through this time, the banking sector, has provided loan deferrals to SME businesses, but not loan waivers or interest free periods,” Morrison said.

Earlier this month the Shopping Centre Council of Australia revealed that landlords have provided $1.6 billion in rent relief to 84% of small ‘mum and dad’ and midsized businesses.

Meanwhile hundreds of thousands of small SMEs ‘mum and dad’ businesses across Victoria impacted by Premier Daniel Andrews’ stage four restriction are still not eligible for financial support from the government.

Small Business Australia said as many of 250,000 businesses that were forced to closed due to the stage four restrictions have missed out because the government tightened eligibility criteria, allowing only businesses registered with WorkSafe insurance.

The government has refused to budge on the eligibility criteria. There were more than 640,000 businesses with fewer than 20 employees in Victoria, the majority of which were sole traders without any employees.

Furthermore, Victorian Treasurer Tim Pallas recently announced additional measures to force commercial property landlords to further reduce rents for businesses impacted by the stage four restrictions.

Morrison said if the intention of the commercial leasing code was to support small to medium sized businesses through the lockdowns, governments must give equal weight to the interests of SME property owners and investors who have been hit hardest by the mandating of rent waivers and reductions.

He added that commercial property owners are not just major listed real estate investment trusts and institutional investors, many are mid-tier and small private groups including self-managed super funds (SMSFs) and ‘mum and dad’ investors.

He said these owners are highly motivated to support existing tenants who are experiencing hardship and were doing this prior to the code’s implementation.

“We don’t need extra regulation to do this. In most jurisdictions the worst of the pandemic is clearly behind us and the economy is re-opening. We have also seen perverse impacts from the code where some high-profile tenants have refused to pay rent even though they are legally required to do so.

“The sanctity of the lease covenant has been a fundamental tenet of the Australian legal system and its primacy should be restored as soon as reasonably practicable to restore confidence in the market.

“Extending the commercial leasing code will add billions of dollars in costs for property owners and investors with potentially serious consequences for the economy and financial system,”

Morrison warned the costs would increase risks to the financial viability of commercial landlords.

“Clearly, the risk is greatest for smaller to medium sized owners and investors who may have more debt and weaker balance sheets.

“These property owners are potentially also more exposed to domestic banks for lending with higher gearing ratios and at greater risk of breaching debt covenants.

“Extending the codes in states and territories where business has been able to reopen poses an unacceptable burden on another section of business, with potentially damaging consequences for our economic recovery.”

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