Capital Economics: Commercial rental arrears will sort itself out

The persistent non-payment of rents in the commercial sector will improve by the time the eviction ban lifts in March next year, because the economy should be in better shape by then.

That was the view of Andrew Burrell, chief property economist at Capital Economics.

He responded to the proposition that we should be alarmed that the end of government support could signal a mass wave of defaults and failures.

Burrell said: “We are not convinced. The economic recovery should help ease the situation.

“Although the data have underwhelmed over the summer, with retail sales down for the fourth month in a row in August, we expect a strong consumer spending revival to drive growth into 2022.

“And for leisure, the removal of restrictions is likely to funnel more of the demand from goods into hospitality services.”

That is not to say there are no concerns about the end of the eviction ban.

Once it expires landlords will be entitled to seek redress for accumulated unpaid rent.

This means the retail and leisure sector could be under additional stress in the recovery period.

Burrell went on to say that things are not simple, because some high-profile financially sound multinationals have used the crisis to avoid their rent obligations.

He commented that the government may need to flesh out arbitration plans to prevent a further deterioration in relations between tenants and landlords.

The government has said debt accrued from March 2020, where tenants were forced to close due to covid-19 until restrictions were lifted, should be ringfenced.

Landlords and tenants are encouraged to negotiate waivers of this deferred or ringfenced arrears.

Burrell added: “Neither landlords, nor banks, have much interest in pushing for a punitive settlement and so it is likely that compromise will be reached involving some forgiveness of past arrears.

“If re-payment forces some retail operators out of business, for instance, few others will be keen to pile into a sector in long-term decline.

“That much seems clear from already-high levels of shopping centre vacancy in many towns.

“So agreement to share losses with existing tenants will be the best option in most cases.”

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