In a battle to cut mounting losses caused by the Covid-19 lockdown, retailers and landlords are set for a face-off over rent holidays.
While restaurants and mom-and-pop stores were the initial front of the skirmish, it has already expanded to JSE-listed retailers and even warehouses, which are testing the strength of their leases.
In recent days, landlords contacted by the FM have been in crisis meetings on how to deal with the lockdown, which has closed all stores except those selling essential items such as food and medicine. In some cases, retailers have flatly said they won’t pay rent during the forced closure.
While restaurants were the first to ask for rental concessions, now larger retailers with deeper pockets are making similar demands.
The SA Council of Shopping Centres (SACSC), which represents both retailers and shopping centre owners, is trying to play peacemaker. "There has to be a concerted effort to find a way that works for everyone," says Stephan le Roux, the council’s president.
"You can’t just pass on the load. In the interest of the industry as a whole, there must be co-operation and realistic expectations by all parties."
Le Roux says retailers have obligations towards employees, suppliers and landlords. On the flip side, property owners spend about 60% of rental income on rates, operational costs — including security and cleaning — and interest on loans.
Firms in greatest need of relief, says Le Roux, are mom-and-pop retailers, restaurants and service providers with limited cash and slim odds of recovering lost revenue.
"The focus here should be on the smaller retailers in the immediate term; big national retailers have resources they can tap into, like shareholders or extending existing credit lines," he says.
Yet those big retailers are also taking a knock. Le Roux says they make 80%-90% of their turnover in shopping centres, and occupy about 80% of the floor space in malls. This means both sides depend on each other. "Forcing shopping centres out of business or retailers to close their doors is not in anyone’s interest. Everybody has to take pain — but let it be shared."
JSE-listed property heavyweights Hyprop, Liberty Two Degrees, Growthpoint and Redefine own the majority of the malls in SA. However, property companies with industrial space will be less affected, as warehouses will still be needed during the lockdown.
Last week, the impact of the lockdown came into sharp relief when Grant Pattison, CEO of SA’s largest clothing retailer Edcon, said it only had enough cash on hand to pay salaries.
Worse — he said it wasn’t clear if Edcon would be able to reopen once the lockdown ends.
Other retailers are taking a tougher stance. TFG — with brands including Foschini, Totalsports, Markham and Sterns — has simply told landlords it will stop paying rent during the lockdown. Until now, TFG has been an outlier performer in a dour environment, releasing positive updates while its peers battle.
"The decision was not taken lightly and has been guided by legal counsel," says Brad Rothenburg, head of TFG Property. "In these extraordinary times we must find ways to navigate the current climate, find solutions to mitigate the impact and ensure business continuity."
Rothenburg isn’t predicting when TFG will begin paying rent again either — he says the retailer will assess the full financial impact once the situation stabilises, and then "engage with landlords".
Woolworths is also talking to landlords. The group has closed its Country Road stores in Australia indefinitely. In SA, its fashion, beauty and home products are not considered essential goods so these parts of its stores are cordoned off.
Massmart is also talking to landlords about reducing its rent since all its Builders Warehouse stores are closed. Massmart, now run by Walmart veteran Mitch Slape, is consulting lawyers, the Consumer Goods Council of SA and the trade & industry department.
This week the SA Property Owners Association, together with the SA Reit Association and the SACSC, hosted a conference call to discuss the crisis. Association chair Estienne de Klerk said in the call that the focus should be on protecting smaller tenants.
Some tenants had taken an aggressive stance to not pay rent, but this "isn’t helpful when we are all dealing with cashflow issues and the priority should be job protection and assistance to the smaller businesses", he said.
Laurence Rapp, CEO of Vukile Property Fund, says one problem is that landlords have no idea which tenants will go to the wall, which will bounce back quickly and which will take longer to recover. "The big tenants really should have the wherewithal to get through this," he says.
The landlord-tenant tension reflects what is happening globally. In the UK, Primark, New Look, Frasers Group and Footasylum have asked for rental holidays. The JSE-listed UK shopping centre owner Intu said recently that it has received less than one-third of the UK quarterly rents it is due, according to retailgazette.co.uk.
In Germany, media reports say adidas, shoe chain Deichmann and Swedish clothing giant H&M plan to halt rent payments.
Kai Warnecke, the head of the German Property Owners’ Federation, is quoted as saying adidas’s default on rent must not set a precedent.
"If so, it would be the end of the real estate market."
Jan-Marco Luczak, the legal policy spokesperson for chancellor Angela Merkel’s conservatives, says "financially strong corporations" should not forgo rent payments and balk on contracts. "The decision of adidas is wrong," Luczak says.
Back home, Le Roux says while many companies have obtained legal opinions, "the answer is not in litigation".
"Not only will it be too late but there can be no winners. I think the property owners realise that relief to various degrees will be required across the board. However, property companies are also limited in how much they can assist," he says. Any relief they can offer will be "limited".
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