Side by Side: Asset Management during COVID-19

Managing a commercial property asset through coronavirus is undoubtedly the greatest challenge most landlords and tenants will face in their property’s lifetime.

So how is COVID-19 affecting the management of commercial properties and what can landlords and tenants do to best prepare for the coming months?

It will take a united, calculated approach to successfully navigate this period, and here is what we know:

HOW IS COVID-19 AFFECTING COMMERCIAL PROPERTY AND MANAGEMENT?

The impact of COVID-19 on commercial property depends largely on the industry or asset class in which you conduct your business. Supermarkets and home hardware stores have seen a burst of activity, with sales at some stores up by more than 40%, which will have long-term effects in regards to rent reviews and percentage rent into the future.

Fast food is seeing a divergence of results, with restaurants that have drive-through able to maintain or even increase revenue, while those without are limited to delivery and pick up only.

In the medical sphere, properties operated as general practitioners are well placed, while others such as chiropractors, dentists and optometrists are all seeing significant drops in trade as telehealth options aren’t appropriate for them.

Childcare, meanwhile, was facing substantial challenges, this has been softened somewhat due to the Federal Government’s direct assistance package to provide free childcare for working parents.

When it comes to commercial property management, we’re already seeing tenants withholding rent. It’s important to note that without an agreement from a landlord, withholding rent is not a solution and the tenant will eventually be required to repay that amount.

Other tenants are asking their landlords for relief, and there are important distinctions to be made between rent reductions, deferrals and abatements. A deferral means a portion of the rental amount will be made at a later date but is still payable, a reduction means a shrinking of the overall face rent, which can have long-term implications for the life of the lease, while abatement means the landlords writes off the rent for a set period and it is not payable by the tenant.

WHAT CAN LANDLORDS DO?

The most important step a commercial property landlord can take during this time is to play the long game. You’re far better off working with a quality tenant and finding a solution that will keep them in the property long-term than to take a short-sighted approach of holding them to their full rental responsibility.

The Federal Government has announced support for landlords in the form of BAS and land tax concessions, while banks are offering the ability to defer principal and interest repayments. A number of state governments have announced packages that will cut land tax for commercial property owners, to reduce their overall financial burden.

Other advice we’re providing to landlords who are in a position to do so is to use this opportunity to perform any refurbishment or major works that would otherwise have disrupted their tenant’s business. If the business is closed, doing these upgrades now means no downtime once the tenant reopens, as well as increased depreciation benefits on the new fitout.

Landlords should also be aware of the security implications if their property is vacant for a period of time, and notify their insurer.

WHAT CAN TENANTS DO?

A number of assistance mechanisms are available to tenants, most notably the new $130 billion JobKeeper program, which has won final approval and is a gamechanger for tenants.

JobKeeper is the lifeline that many tenants need, as it provides a fortnightly payment of up to $1500 per employee, which will enable many workers to remain in their jobs and keep those businesses running. For this reason it’s critical that tenants access JobKeeper, as for many it will be the difference between remaining viable and creating a vacancy in the property.

Tenants should also engage with their landlord as soon as possible, to negotiate the best possible outcome for both parties in regards to rent relief that will allow the tenant’s business to survive while also covering the landlord’s significant costs.

WHAT GUIDANCE IS THE GOVERNMENT PROVIDING FOR LANDLORDS?

The government’s new code of conduct for commercial property tenancies is intended to bring landlords and tenants to the negotiating table together to reach an amicable solution.

The challenge here is that much of the terminology within the code is not clear, and may be difficult to apply to individual cases as every landlord and tenant’s circumstances are different.

Much of the assistance and rules mandated under the code are intended to last six months, however no one knows how long the virus will impact the market, meaning tenants are potentially exposed after the six-month period and moratorium on evictions concludes.

Again, the key here is to talk as landlords and tenants, assess the tenant’s ongoing ability to pay and then plan or act accordingly. Tenants’ circumstances may also change from month to month, so maintaining those lines of communication in the long-term is paramount.