One of the casualties of the economic crisis that has arisen due to the COVID-19 Pandemic has been the impact to the residential and commercial rental market.
The impact to the residential market has been immediate with hundreds of thousands either loosing their jobs or being stood down. As a result, impacted tenants found themselves without the cash flow to pay their weekly rent. The government encouraged landlords to act in good faith and advocated a moratorium on forced evictions during the pandemic. In NSW for example there is currently a 60 day stop on evictions where the household is in financial hardship due to COVID-19 and this initial stop will be extended to October 15.
Tenants need to be mindful, that unlike commercial rents where there is a provision for part of the rent to be waived, this does not currently apply to residential tenants unless agreed to by the landlord. Ultimately any rental abatement will mean that at some point the rent will still need to be paid. So, vacating the premises and moving back home with mum and dad, does not void the tenant’s financial obligations to the landlord.
The impact extends to landlords too, many of whom have mortgages which at best, they may qualify for a loan repayment holiday. But like their tenants, at some point they have to pay up and play catch up.
The commercial leasing market is somewhat different in that the impacts will be felt on several fronts. There is talk that the market has changed for the foreseeable future, whilst some say it has changed forever.
The Federal Government announced a mandatory code of conduct for commercial leases in April which provided for small and medium sized tenants to obtain rent relief proportionate to their drop in turnover.
Over and above those small to medium sized tenants, there are larger ones who occupy large floor spaces of retail shopping centres and commercial office blocks. Often times it is funds management owners and superannuation funds who own high rise commercial buildings and they will be challenged like never before in arriving at fair market valuations on their buildings.
Historically, commercial offices provided tenants with ‘incentives’ of varying types with the goal of maintaining a base gross rent off which the building could be valued. The incentive may have been in the form of a contribution to a fit out or rent free period.
However, moving forward, in the current market conditions which economically may get worse, are these gross rents going to be maintained. If not, how will commercial office owners be able to demonstrate to their banks the value of the premises they have lent money against or generated a return on the assets they hold for their superannuation fund unit holders.
And that is the dilemma facing commercial property owners – when that rental return knife is falling, how do they catch it to maintain valuations acceptable to their lenders and investors.
Written by Grant Bailey