Retail tenant relief package puts pressure on unlisted property groups

Last week, the recently formed Property Industry Group announced the availability of industry-wide assistance and relief packages for all retail tenants during South Africa’s 35 days of lockdown.

While this will provide a much-needed stopgap for many tenants concerned about their operational viability post-lockdown, the announcement puts pressure on the various unlisted property groups, many which are not part of the Property Industry Group and were not consulted on the proposed packages, says Soria Hay, head of Corporate Finance at Bravura.

The Property Industry Group consists of the sector’s three biggest players, namely the South African Reit Association (SA REIT), the SA Property Owners Association (SAPOA) and the South African Council of Shopping Centres (SACSC), and is the mouthpiece for the South African commercial real estate sector.

The intention of the assistance and relief package initiative is to preserve the jobs of retailers, suppliers and service providers, with a qualifying criteria for tenants to ensure that no staff retrenchments are made during the relief period. Assistance and relief is to be at the discretion of the landlord, but the package stipulates the minimum that qualifying retailers can expect.

The package is to be made available for the periods of April and May 2020 and will provide basic assistance and relief as well as interest-free deferment recovery periods for SMMEs and tenants providing non-essential services. Relief can consist of rental reductions (between 35% to 100% for the first month and between 25% and 50% rental reduction for the second) or rental deferments.

The Property Industry Group acknowledges that the relief package comes at a high cost for the industry. Group spokesperson, Estienne de Klerk says that it is time for bigger and stronger companies to step up and form a buffer to protect smaller retailers so that the sector can collectively come out stronger.

Unlisted property groups and independent shopping centres are not part of the Property Industry Group collective. As such these industry players were not included in the consultation process that took place when obtaining buy-in for the proposed package. Yet the relief initiative undoubtedly sets an industry precedent which could see independent landlords and property groups challenged to provide similar relief to their own tenants.

Although the listed property sector has not been immune to the challenges experienced by the retail sector preceding lockdown (in fact it was named as the worst-performing asset class of 2019) there is arguably better liquidity and wiggle room here in which to provide tenant assistance than within their unlisted counterparts. Just recently leading REIT, Redefine Properties, which owns more than 300 retail properties across the country, said that it was in a position of strong liquidity with which to face off the lockdown, with access to R2.8 billion in committed undrawn credit facilities. This is certainly not the case for several thousand medium and small retail operations in South Africa.

Prior to lockdown, retailers were already experiencing the negative COVID-19 impacts. For example, in the short “stay at home” period leading up to the original 21-day lockdown, struggling retail group Edcon was hit with a 45% income loss and a reduction of about R400m in sales from flagship stores Edgars and Jet chains. The group anticipates a further R800m loss in sales over the lockdown period and a question mark remains over whether the group will be able to pick up operations once the lockdown is over. The ripple effect if Edcon folds will be felt throughout the sector – listed and unlisted.

The Property Industry Group has only stipulated the relief package for April and May, and it will be a different ball game should timeframes become longer. For the unlisted sector – and their tenants – with less concerted relief efforts available, the playing field may grow more uneven.

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