Bewley's on Grafton Street isn't the only retail or service outlet to have locked horns with a landlord over rent. There is now a big logjam in the system around who is paying what in rent and who is not.
owhere is this more likely to be true than in shopping centres. Under the Government’s reopening strategy, shopping centres such as Dundrum and the Pavilions in Swords, co-owned by British real estate firm Hammerson, are not pencilled in to open until phase five, or August 10.
Hammerson has had a bad week. The shopping centre operator had to terminate the £400m (€456m) sale of seven retail parks in the UK after the prospective buyer, Orion, got cold feet about the deal.
Orion was due to close the deal at a 22pc discount to last June’s book value, but didn’t want to proceed. And why would they? The British economy is forecast to shrink by about 14pc this year and months of closed retail outlets will inevitably impact on rental income, and thus the value of the properties. Hammerson shares fell further on the news and by late in the week were trading about 80pc lower than at the end of December.
Rent was also in the mix when Debenhams in the UK said this week it would close a further five stores, all of them in Hammerson-owned British shopping centres, because it couldn’t reach a deal with the landlord on a rent restructuring.
Debenhams said it had agreed terms on the vast majority of their UK stores, but had been “unable to agree terms with Hammerson on our five stores in its shopping centres, so they will not be re-opening”.
It isn’t clear how many retailers at shuttered shopping centres in Ireland have not paid their rents or intend to hold out further. The figure looks pretty devastating in the UK, where Hammerson has said it received only 37pc of rents billed on the last quarter day in March. The situation is likely to be even worse come June.
Its Irish assets — which include stakes in the Dundrum, the Ilac Centre, Pavilions and Kildare Village — account for just 10pc of its total portfolio. Together with Allianz, it paid somewhere north of €1bn for the Dundrum Centre in 2016 and re-financed the deal a year later which valued it at €1.5bn.
The short-term outlook for shopping centres is not good because of the coronavirus. Not only will they remain closed until mid-August, they are also likely to carry plenty of social-distancing measures when they do finally open up again.
Shopping centres have been opening up in the last week or so across a number of US states. In Texas, for example, the restrictions are onerous. Typically, a shopping centre can only allow 25pc occupancy, some entrances must be closed, all staff have to be temperature-tested and wear masks, and free masks are handed out to customers.
Fitting rooms and rest rooms in some clothing stores are closed while others have a policy that any garment tried on or returned must be removed from the sales floor for 24 hours. Food outlets are takeaway only or must have very limited seating numbers. Shops are open for limited hours to allow for daily deep cleaning.
It isn’t an enticing shopping experience. But it also raises big questions about how retail tenants will be able to make money in those conditions and how that might impact on rental payments even after reopening.
Hammerson has been selling down assets to reduce debt. In 2019 it racked up losses of £573m which followed a £173m loss in 2018. It had been executing its plan to turn this around quite well until the virus came along.
Hammerson has said net rental income would have to fall by 64pc over the year as a whole in order to breach its interest income covenants. However, the market is speculating it will need to issue new equity or raise cash — somewhere between £550m and £1bn. It may have to either sell new shares at a deep discount or assets at a deep discount.
Plane difficult
Retailers aren’t the only ones holding out on paying rent because there is no money coming in. Airlines are doing something similar with the planes they lease from big firms like Dómhnal Slattery’s Avolon.
Slattery said during the week that 80pc of Avolon’s customers have sought payment relief measures as the bulk of the world’s airline fleets remain grounded.
Avolon has 150 airline customers in 62 countries. The firm has had to scale back orders with the likes of Boeing for new aircraft. It has cancelled about $4.5bn (€4.15bn) worth of new aircraft business.
Airlines can’t pay their leases. Leasing firms have to pull out of new fleet orders. All roads lead to plane manufacturers and the lenders to leasing companies.
Where does the money-flow logjam end? The US Fed to the rescue.
Boeing was expected to need a US state bailout until recent days. Because of the enormous bond-buying and liquidity support mechanism in place from the US Fed, the plane-maker was able to raise $25bn (€23bn) in the market.
This seems extraordinary given the contract cancellations but because the Fed is buying trillions in corporate bonds, the company was able to raise the money. When is a state bailout a Fed bailout?
Even Apple Inc, with tens of billions in cash on its balance sheet, went ahead and raised more than $8bn (€7.39bn) in the bond market at very low rates with maturities ranging from three to 30 years. The iPhone maker plans to use the money to fund share buybacks and general corporate purposes. Virtually free money from the Fed will fund Wall Street bankers and Apple executives’ share remuneration.
Avolon went into this crisis in pretty good shape having recorded revenues of more than $1bn and it has plenty of liquidity to get through the turbulence. Future growth will be harder to achieve whether you are Boeing, Avolon or British Airways as international travel is not expected to return to 2019 levels until 2023.
Alphabet soup
The economic outlook from the pandemic has been described in various different ways. At first it was going to be V-shaped. Then U-shaped. Some talk about double V or even double U.
In truth nobody has a clue, not even the Bank of England or the European Commission. Both issued bizarrely upbeat forecasts last week, which weren’t actually forecasts at all. The Bank of England described theirs as an “illustrative scenario”. For this read “total disclaimer if turns out to be completely wrong”.
The Bank of England sees a 14pc shrink in economic activity this year followed by a 15pc bounce-back next year if lockdown restrictions are loosened over the coming months. UK GDP was £2.2trn in 2019. A 14pc drop this year would reduce it to £1.89trn in 2020. A 15pc bounce back would see it reach £2.18trn in 2021, just a smidgeon below its 2019 level. What about Brexit? What about reality?
The European Commission outlook talks about an 8pc economic drop for Ireland this year and a 6pc bounce in 2021. We should be so lucky!
Central Bank governor Gabriel Makhlouf believes the more pessimistic forecasts for the eurozone are the most realistic, including a 12pc eurozone contraction this year.
Plan for the worst and hope for the best looks like the best assessment.
