Retail landlords face rental troubles over Covid-19 lockdown

The Covid-19 lockdown is forcing more retailers into a position where they may not be able to pay their property rentals, which is set to add to the pressures being experienced by retail landlords and South Africa’s struggling listed property sector.

Edcon announced last week that it can only pay workers’ salaries due to the impact of Covid-19 on sales, and now peer clothing giant The Foschini Group (TFG) plans to stop rental payments as a result of the lockdown.

News agency Bloomberg reported at the weekend that TFG, which has had to close all of its stores in South Africa as part of the 21-day lockdown, has sent a letter to its landlords about the stop in rental payments. Moneyweb understands that other retailers, big and small, are also contemplating putting a stop to rental payments as business has ground to a halt.

Only essential services such as grocery stores, medical facilities, pharmacies, fuel stations and banks are allowed to operate during the lockdown, which is aimed at curbing the spread of the Covid-19 pandemic.

Non-essential retailers hard-hit

Clothing groups, DIY stores and general merchandise retailers such as Edcon, TFG, Mr Price, Pepkor (including JD Group), Truworths, and Massmart chains such as Builders Warehouse are set to be hard-hit during this period, with Easter holiday trade being affected.

Edcon alone has some 750 Edgars and Jet stores countrywide, covering around a million square metres in retail space. Better-performing TFG, which has around 29 retail brands including Foschini, American Swiss and Sportscene, has more than 2 500 stores in South Africa covering around 750 000 square metres of retail space.

Covid-19 presents an “unprecedented challenge” to Edcon’s “already constrained cash flow” the group’s CEO Grant Pattison said in a statement.

Following President Cyril Ramaphosa’s first announcement around Covid-19 and the country’s state of disaster measures on March 15, the group said that its turnover had declined 45% in comparison to the same period last year. This resulted its sales for March being R400 million below forecast, while during the 21-day lockdown the group is projecting lost turnover of around R800 million.

Salaries more important

Speaking to Moneyweb, Pattison reiterated that this meant that the group only had enough liquidity to pay salaries, which it sees as a priority amid Covid-19 uncertainty.

“Edcon is unable to honour any other accounts payable during this period and that includes rentals to landlords. We are not alone, and many other businesses are also being badly affected especially under the lockdown,” he said.

Pattison added that the group will be working closely with government and other stakeholders to better understand what sort of assistance will be offered to business to mitigate the impact of Covid-19 and the lockdown.

Questioned by Moneyweb about retailers deciding not to pay rent, Neil Gopal, CEO of commercial property advocacy body the South African Property Owners Association (Sapoa), warned that non-payment of rentals could cause the collapse of malls and severely impact retail property firms.

‘Unlawful’

“We have seen correspondence from national retailers, stating that they will not be paying any rent (and even other lease charges) during the lockdown period. In our view, this position is completely incorrect, and unlawful,” he says.

“Every class of tenant [is] approaching landlords for rental remission, rental holidays and now also refusing to pay rental …

“In our view, a total rent remission will probably not be applicable, as the tenant will still be using the premises during this time, and their business assets will still be situated in the premises,” he adds.

Gopal says while Sapoa is sensitive to the issues retailers may face, it is important to note that landlords face the same pressures.

“Landlords are encumbered with debt, still have to pay rates and taxes, and have operational expenses regardless of whether the mall is operating or not.”

He points out that Ramaphosa and various government departments have also announced various measures to alleviate the economic effects of the lockdown on businesses.

What about insurance?

“Tenants and other businesses should be encouraged to make use of the measures, and to do so in a responsible measure. Also, most lease agreements require tenants to obtain, and keep in place, their own insurance for their businesses, which normally includes business interruption insurance.

“Tenants ought to be encouraged to claim against their insurance first,” he adds.

As a measure to help mitigate the impact of the pandemic on the retail property industry, the Department of Trade, Industry and Competition (DTIC) on March 24 gazetted the Covid-19 Block Exemption for the Retail Property Sector in line with the Disaster Management Act. This effectively loosens rules around certain aspects of the Competition Act to allow retail landlords to work together in responding to Covid-19 issues faced by the sector.

According to the DTIC, which will be the main driver of the block exemption scheme, the new rules will apply only to agreements or “concerted practices” in respect of:

• Payment holidays and/or rental discounts for tenants;
• Limitations on the eviction of tenants; and
• The suspension or adjustment to lease agreement clauses that restrict the designated retail tenants from undertaking reasonable measures required to protect viability during the national disaster.

“To qualify for exemption, such agreements must extend to all South African retail tenants in the designated retail lines, including small and independent retailers. The designated retail tenants covered by this block exemption are identifiable by the designated trading lines, namely: clothing, footwear and home textile retailers; personal care services such as hairdressers, health and beauty salons; and restaurants,” the DTI notes.

Gopal, however, says national retailers are not interpreting the new regulations adequately.

“The unilateral decision by some tenants to stop paying rent is illegal. Most of the national retail chains have shareholders and bankers that could provide assistance during this crisis, but this is likely not the same for small businesses, whom we believe are the first line of tenants we need to defend and who form the majority of the tenant base,” he explains.

“The intention from the presidency was not that landlords bear the full brunt of the lockdown. We too are affected as the payment of utilities and property rates have to continue,” he points out.

“National retailers in most cases are bigger businesses than the landlords,” he adds.

“It is our request that national retailers continue paying their rental – even on a month-to-month basis – to ensure the sustainability of the shopping centres.”

Estienne de Klerk, chairperson of the South African Real Estate Investment Trust (SA Reit) Association tells Moneyweb that there is a scheduled teleconference meeting of property industry stakeholders to come up with response to issues facing landlords and tenants on Monday.

“It includes Sapoa, the SA Reit Association and the South African Council of Shopping Centres – the three biggest industry bodies covering SA’s retail property sector. Both retailers and landlords are facing not a perfect storm, but a perfect hurricane with Covid-19 adding significantly to the country’s economic woes. We want to work together on this,” he says.