The financial impact of the coronavirus crisis is gradually spreading through Europe’s commercial real estate sector.
Occupiers felt it first. Their businesses’ income was vastly reduced or cut off entirely. Landlords came under pressure as their tenants failed to make quarterly rent payments. Lenders are now braced for the impact, with interest payments across many loan deals due this month.
The situation in the property market led the UK government to pass legislation to help commercial tenants weather the storm. The UK Coronavirus Act, which came into effect on March 25, prevents landlords from taking enforcement action against tenants for non-payment under leases until the end of June.
A number of landlords across Europe had already granted rent holidays to their tenants. In most cases, rent is being deferred, although in some cases it is being waived completely. But while such steps will help to keep occupiers afloat, they place a financial burden on landlords to meet their obligations to debt providers.
Pressure is mounting for lenders to adopt a lenient approach with their borrowers. On April 2, the London Property Alliance – an industry body which represents commercial landlords in the British capital – wrote an open letter to UK chancellor Rishi Sunak in which it implored the government to support the city’s property sector. Among its requests was a call for ‘financial flexibility’: it asked for “the strongest possible political support and government guidance to lenders and funders to grant the same flexibility to the property sector as it is providing to tenants which need support through this crisis”.
Lenders have a responsibility to help their sponsors through the pandemic, in the hope that solid real estate market fundamentals return once it is over. One real estate researcher spoke of the emergence of “partnerships in pain” in which landlords are proactively taking steps to find a balance between their responsibilities and their tenant’s responsibilities, so the businesses do not fail as they go through this crisis. The same principle applies in the real estate debt market.
Debt providers that we have spoken to indicated that they are prepared to take a collaborative approach with borrowers. There seems to be a general recognition that this situation is very different to the global financial crisis of 2007-08, when there were plenty of bank-led sales and enforcement processes. This time, lenders suggest dialogue with sponsors will be the best way to ensure loan facilities keep performing in the medium to long-term.
As such, lenders are likely to adopt a flexible approach to breaches of loan covenants, as has already been seen in the retail property sector in the past couple of years. However, in the short-term at least, many will need to go further and grant a deferral on interest payments. As one source said, if borrowers approach their lenders with transparency about their situations, lenders are likely to add interest they cannot pay to the following quarter’s payment date, without adding default or penalty interest. It is yet to be seen whether lenders will agree to such measures on a wide scale, but it may be prudent for debt providers to share in their sponsors’ short-term pain.
Lenders, of course, face their own set of pressures. In today’s diverse European real estate lending space, debt providers have a variety of funding models. Some write senior loans from large balance sheets, while others themselves take on credit facilities and investor capital in order to lend, often in higher-yielding situations. There will also be individual situations where the covid-19 crisis exacerbates ongoing problems faced by certain borrowers.
While the response within Europe’s real estate lending industry is unlikely to be uniform, attention is turning to how debt providers will play a role in supporting the wider industry through this time of crisis. In many situations, interest payment holidays will be the most obvious way they can help.
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