Amid the negative impact of Covid-19 on the retail property sector, real estate investment trust company Liberty Two Degrees (L2D) FD José Snyders says rental relief enables retail businesses to navigate the effects of the pandemic while ensuring that retail spaces remain appealing to the public.
“Rent relief, in the context of last year, when we had various stages of lockdown with iterations of restricted trading or no trading at all, was very relevant and necessary.”
He explains that, in a retail space, it is important to not have significant vacancies because the environment can become unappealing to potential shoppers. The highest tolerable vacancy in a mall is about 5%, he adds.
The environment needs to remain functional and provide customers with a broad offering of what they need.
“In providing rent relief last year, there were many discussions with the industry bodies and coordinating efforts with the landlords in the country about what kind of support could be provided for tenants in our portfolio,” explains Snyders.
Consequently, L2D provided discounts, in 2020, of more than R314-million across the portfolio of assets owned by L2D and financial services provider Liberty group.
L2D owns a third of the Liberty property portfolio, valued at about R27-billion in assets. The assets are primarily in the retail sector, with about 80% of L2D’s income from malls, both super-regional and regional.
Predominantly, the discounts were provided for smaller retailers, restaurants, and smaller businesses operating within the properties.
“Apart from it being the right thing to do in the context of helping one another through this pandemic, it also remained important for us that our business is sustainable, as well as the businesses of the underlying tenants,” says Snyders.
L2D evaluated the level of difficulty that a tenant was facing by considering the revenue breakeven point, relative to the rental, and allocates relief based on the tenant’s earnings in the current environment versus what the business was earning before the pandemic.
While the short-term impact of rental relief is loss of profitability, it is improvident for a tenant to lose his/her business because the landlord is unable to provide some level of support, adds Snyders.
The business needs to be sustainable. Businesses need to be assessed to ensure that they have sustainable rentals and can generate turnover.
L2D emphasises the necessity of gaining an understanding of what the sustainable level of trade is for a tenant in its portfolio, and then to the extent possible, provide support that makes it financially sustainable.
However, in some cases, there are too many similar retailers in a mall. In some instances, the contracts of these businesses had to be ended or were not renewed because the businesses were not sustainable, even pre-Covid, where no amount of support would enable L2D to keep them as tenants, Snyders explains.
The longer-term impact of rental relief is that some businesses and jobs are saved. When a tenant moves out, a replacement tenant needs to be found.
“However, there are a limited number of retailers available that can take that space,” adds Snyders.
Additionally, the current challenges have forced stakeholders to reassess the retail environment. The massive footprints that retailers currently have is likely to reduce overall in the sector.
The trend to shift to online, with logistical solutions having become more efficient, enables shops to take up smaller space.
“In line with global trends modern South African retailers do not need to store a lot of stock in the physical store because they have warehouses and improved logistical solutions,” he points out.
These trends have been accelerated by Covid-19 and, in the longer term, will push the sector to a point where large formal retail will reduce, concludes Snyders.