A LESSON LEARNED
RETAIL landlords are suffering immensely under the lockdown conditions as the majority of their tenants are unable to pay rent.
“Smaller malls may not survive at all,” says Neil Gopal, chief executive of the South African Property Owners’ Association (Sapoa).
The lockdown is having an “extremely detrimental” effect on the financial position of mall owners because up to 80% of tenants have been forced to discontinue business operations during the lockdown. They are, therefore, not in a position to pay their rent.
This, Gopal says, is causing mall owners to experience “serious cash flow problems” as they do not have sufficient finances to pay property rates and utilities.
“For the month of April, by and large, only approximately 20% of rent has been received by most shopping centres.
“In most cases, landlords have not received enough rent to cover their interest; rates and taxes and pay for operational costs. Landlords need the cash flow to service operational expenses, including salaries and wages for security and cleaning; rates and taxes and amortising loan facilities.”
Gopal says the property industry has been at the heart of growth and development in South Africa over the past 25 years. The sector has spearheaded the development of world-class retail, residential, office and industrial properties and continues to do so as a sign of confidence in the country.
“No other sector of the economy has committed more capital than the property industry in the past 10 years, even under difficult conditions. In the process, the retail industry has become by far the largest private sector employer in South Africa aided by the investment the property industry has made.
“The reality is that many businesses will be closing down and many employees who are lucky enough to keep their jobs may be faced with reduced remuneration from their employers or, at best, zero annual increases.”
At the end of last month, major representative bodies for real estate in South Africa – the SA Reit Association, Sapoa and the SA Council of Shopping Centres formed a collective, The Property Industry Group, announcing an industry-wide assistance and relief package for retail tenants hardest hit by the initial 21-day lockdown. Although the initiative focused principally on supporting affected SMMEs, spokesman Estienne de Klerk says it also provides relief and assistance to all other retail tenants and will be rolled out by landlords nationally.
“The initiative targets preserving jobs
– for retailers, their suppliers and service providers. To qualify for the relief benefits, retail tenants need to undertake not to retrench staff during the relief period. Significantly, the package stipulates that all tenants whose accounts were in good standing at February 29, 2020, can be assured that there will not be any evictions for the next two months.
“In addition, retailers prevented from trading in compliance with South Africa’s government-mandated lockdown (non-essential services), and in good standing at the end of February 2020, are offered some form of assistance from landlords. The extent of that relief depends on the severity of impact.”
He says shopping malls accommodate a wide range of retail tenants affected by the lockdown and, when putting together the package, the property industry engaged with various groups of retailers to get their buy-in.
“We’ve seen retailers reverting to legal positions, but we don’t believe that litigation provides either side with timeous solutions needed to get through this unprecedented time. We need to stand together and find workable solutions that will benefit the country, protect jobs and sustain our businesses through this challenging time.”
This assistance package comes at a massive cost to the property industry, facing its own dire challenges, however, it is necessary for those needing assistance, especially small retailers, to get the support they need, says De Klerk.
NEGOTIATIONS between landlords and large retail tenants during the Covid-19 lockdown period got heated, with some tenants believing they were within their rights not to pay and landlords arguing this was unlawful.
Yet, after some back and forth, real estate representative bodies, including the South African Property Owners Association, the SA Council of Shopping Centres and the SA Reit Association launched a rental relief initiative where landlords would effectively surrender at least R2 billion in basic rent and operating costs, says Nathalie Schooling, chief executive of customer experience company nlighten.
While this might have been a show of goodwill, she says it is also a sign of how important tenants are for landlords.
“Without tenants, landlords cannot exist. Without retailers and service providers, there is no economy. It’s important for landlords to remember that their tenants are essentially their customers and not just rent payers or lease holders.”
Given the weak SA economy, she says a lot of larger property companies probably turned to asset buying abroad and are now carrying debt. It can be argued that this is one of the reasons they wanted to hold onto cash when the lockdown was first announced.
“But it is not the responsibility of the tenant to shoulder this burden. The client needs to be put first if property groups stand a chance of long-term survival.”
A “big problem” in the property sector, she says, is the disconnect and lack of trust between tenants and landlords.
“Often, top executives in retail property management organisations as well as ‘owners’ have no direct communication with their tenants, leaving it to mid-management to form these relationships. Trust is built by using a customer-centric approach, which has become the number one method used across business sectors, to obtain competitive advantage. It’s time the property sector got on board with this approach.”
Schooling says the way landlords treat tenants is vital for them to retain this client base and that empathy is a key principle in customer experience. If the Covid-19 teaches landlords anything, it is that they should be legally thorough in the future and seek clarity on issues on both their and their tenants’ behalves.
“Legal squabbles over rent, such as those highlighted during lockdown, only waste time and money for all parties. Ultimately, it’s win-win solutions that save the day.
“Engaging in proactive communication with tenants also needs to be top of mind. In times of crisis, rather over-communicate than stay quiet and hope it will all just blow over. It’s in the hard times that landlords can build, or even repair, relationships with their tenants. Showing that they understand their pain points can pave the way for long-term benefit,” Schooling says.