In early March, way before the coronavirus lockdown, I said that one of the big issues for UK economic recovery from coronavirus would be relief from rent obligations which many - from large numbers of domestic renters to students through to the UK High Street - would struggle to meet. I was met with angry comment in response, including in media aimed at landlords.
But I was right. This is the pinch point of stress for a great many. It just so happens that the issue is more visible on the High Street. The FT has just reported:
Retailers in the UK have paid less than 15 per cent of their rent, according to initial figures from Wednesday's quarterly payment date, piling pressure on landlords whose incomes have been cut deep by coronavirus.
Rent receipts on June 24, the day commercial tenants' payments were due for the following three months, were even lower than those for the previous quarter, according to data from Re-Leased, a commercial property management platform.
As I tweeted this morning:
Many retailers have three choices this week. Pay the rent. Or pay the staff. Or close because they can’t do both. Legal reform to force rent cuts have to happen if we’re going to keep the UK economy going.
— Richard Murphy (@RichardJMurphy) June 25, 2020
For many households the situation is even more difficult.
I repeat now what I said in March:
In that case the question has to be asked as to who should bear [the costs of this epidemic].
Firstly, landlords should. I have already suggested that should the epidemic spread then as a matter of statutory right any tenant should be provided with a minimum three-month rent-free period to ease the stress upon them whilst this crisis last. I would suggest that the grant of that extension should be automatic to anyone who does not make a due payment of rent on the required date during the period of the epidemic. They should be automatically granted this extension by the landlord without having to make any further application or to complete any additional paperwork.
I stress that the cost of this will fall directly upon the landlords in question. I am quite deliberately suggesting that they should bear the heaviest burden of dealing with the epidemic. The reason is simple and is that whatever happens they will still have an asset at the end of this period, and no other sector can guarantee that at present. As a consequence they have the greatest capacity to bear this cost. And, if it so happens that some landlords do fail as a consequence, the assets that they have owned will still exist after this failure and so the economy can manage the consequences of this.
I did get one thing wrong: a three-month rent extension was clearly inadequate.
I'd now suggest 20%, across the board statutory rent reductions would be in order, as a minimum.
And I'd also suggest rent roll up with liability due over a period eight times longer than the length of the period over which deferral takes place would also be appropriate.
I would match this with a right to claim a mortgage payment holiday to match.
Landlords could survive this. Their tenants cannot.
And I stress: these are outline suggestions for discussion, not detailed policy proposals. But what they make clear is that radical thinking is required now or the rental sector is itself going to collapse - a risk that they should be taking as seriously as I do by making this suggestion.
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Well said and I fully agree. It can be done, and it would be fair and a reasonably argued priority.
You are right, rents are a big problem. However, I fear that a timely and practical solution will evade us.
First, it should have been embraced when it became clear what the scale of the problem was (ie 3 months ago). If we had done that then we could already be tweaking the details and delivering a policy that might prevent thousands of business closures now. Whatever we do now will not help many, many people.
Second, the rental market is highly fragmented so getting a solution that fits most will be tough.
Third, there will be massive resistance from the rich/powerful.
However, the “rent strike” that we see in the commercial sector is massive – far larger than I would have expected and this may push the Government into action and “better late than never”.
First, we need an immediate “standstill” deal where all rental payments and mortgage payments are suspended (and rolled up). This is required today and then allows the policy to be fleshed out over time. It also delivers equal treatment of renters – the current chaos favours large bullies.
“Outright” owners will suffer a loss of income but they are a group that are best able to bear it. (Sure, there will be some cases where this might create hardship but there is an emergency on!)
“Mortgaged” will be able to suspend interest payments so their position (in cashflow terms) will be zero (like the outright owners)
This pushes the problem into the banking system where it is best dealt with. There are a relatively small number of banks that are already closely supervised and the Government can intervene easily to prevent bank failure.
The problem area here are the large property companies that finance themselves in the bond market. The obvious solution would be to allow them to suspend coupon payments on these bonds but this would have massive implications for the corporate bond market and other companies that finance themselves in it. Perhaps a loan facility directly from government to offset these loan payments might work.
In any case, once the standstill is in place then the real work starts!!…. and on this I would like to hear from real people in real businesses before I take a view.
I agree with all that Clive
“am quite deliberately suggesting that they should bear the heaviest burden of dealing with the epidemic. The reason is simple and is that whatever happens they will still have an asset at the end of this period”
Err.. you really have no idea
https://www.google.co.uk/amp/s/www.bbc.co.uk/news/amp/business-51851791
So what if Intu goes bust? It will be one fo hundreds of thousands of businesses if it does
Its building is still there
Other businesses will not be so fortunate
Families struggling to pay rent will not be
Are you sure that landlords can survive this?
https://www.bbc.co.uk/news/business-53195980
Their buildings will
Starving kids are another issue
If we had a universal basic income, landlords who fall on hard times could take comfort from the fact they will receive the same support same as everybody else.
Apart from that, I can’t think of any reason to support economic rents (as almost all property rentals are) even in normal times never mind a national emergency.
The Covid-19 crisis would seem to be a perfect opportunity to strip all kinds of unearned wealth out of the economy and lay the foundation for recovery.
Actually, I think this supports Richard’s ideas.
Intu’s accounts from 2019 show assets of about £6bn supported by debt of almost £5bn.
Intu has gone bust because it can’t service the interest payments on debt it has due to the failure of its tenants to pay the rent.
However, the centres remain open and in many respects it is “business as usual” on the ground…. except that KPMG is in charge.
What is REALLY happening is that everyone knows the current arrangements are unsustainable and there is a disorderly renegotiation of the relationship between tenants, landlords and banks. The questions now are “what will tenants pay going forward?”, “what haircut will the lenders take?” and “who will buy the assets (and at what price) and run the shopping centre business in the future?”. The problem is that in this chaos, “might is right” and big tenants will get better deals than small ones etc., some lenders might get preferential treatment and the current owners will be forced to sell assets into a market with no buyers.
Better all round if rents are suspended, interest payments are suspended and that a deal is then negotiated.
Even better if this is done across the entire sector. Landlords might want their tenants to pay but they are not….. and pretending that they will is silly.
Regarding intu? As a highly leveraged company in a sector that has been under pressure for some years, it is not surprising that it can’t survive a shock. Even in an orderly renegotiation in a general “rent/interest standstill” it would seem unlikely that intu’s current owners would salvage any value.
Thanks
You saved me having to say this
Nice short contribution form Dean Baker,
https://rwer.wordpress.com/2020/06/26/great-time-for-a-vacant-property-tax/
I’ve argued for such thing for a long time