The Effect of COVID-19 on Valuations

I have been involved in many discussions over the past few weeks on the effect of COVID-19 on the values of the properties.

The initial discussions were around the rental holiday that would be applied or would be amortised into the tenure of the lease. However, since then tenants are requesting to only pay 20% of their rentals and in some instances the tenants are refusing to pay the rental and the operational costs as well.

This has a legal implication in that using “force majeure” is against the content of the lease agreement. Negotiating with the landlord for help is one thing but refusing to pay is completely another. SAPOA has taken extensive legal advice in this matter and has advised tenants that they are in breach of the lease agreement and this will result in legal disputes after the lockdown.

Tenants have also been using the opportunity to renegotiate the lease to lower levels, in other words, rental reversion. The tenants' reasoning is that they have not had use of the premises and therefore should not be relied upon to pay, even if a lease is in place. This might cause a natural market adjustment to lower rentals and does happen from time to time especially in an economic downturn.

In my opinion, the effect on values is not showing yet, to me its more of a liquidity issue. In other words, it’s more around whether the client has the liquidity to see this through. We have seen that Edcon says that they cannot afford rental and to pay their suppliers, they only have enough money for salaries for one month. Thereafter, they will be forced into liquidation, the question for us valuers is how that effects our values. I did look at a centre where Edcon were in place and the calculations done on the centre showed that Edcon had already reduced their rental substantially and therefore the net effect on the cashflow was 1% even though the gross lettable area is around 10% of the building. Therefore, the discussion became more around could Edgars weather the storm and the landlord, than about the values changing substantially.

However, when we add in other non-essential merchants, we are then looking at a bigger problem. Yes, I am expecting the smaller guys to take a big hit and possibly liquidation and closing of stores but saying that, most of those guys were already in trouble due to the economy and the effect of COVID-19 had not kicked in yet. Therefore, it is logical that with a combination of both, the smaller companies will not survive. This will influence the cashflow as the vacancies will climb and, as valuers, we will need to take this into consideration. However, we need to be careful of being too conservative and automatically using a higher perpetual vacancy rate.

The one benefit of the lockdown for retail is that it has forced so many people to use online purchasing. Will this change the retail environment? Much like the start of Kindle, the reading device, whilst lots of people bought the electronic version, most people still prefer the feel of a book in their hands. The same will apply for retail, on-line sales will increase but the provider will still provide physical stores. The knock-on effect of the on-line sales is an increase in logistic warehousing as the goods returned from on-line sales will need to be contained in a separate area for repairs or returns to the manufacturer, this will require additional warehouse space to be made available.  This is one lesson we have learnt from Amazon, and as on-line demand increases the industrial space will improve too.

Technology has also shown us that we can essentially continue to operate and, with the advent of Zoom and Microsoft Teams, meetings are still being held. I have been involved in meetings with more than 70 people. This is the positive effect of technology, and can be used going forward for seminars, workshops and webinars and therefore saving costs of venue hiring and further saving valuable time on travelling and cost of accommodation. This will also influence offices as many would have found in lockdown that they can operate from home and this could cause the smaller companies to start doing that and thereby releasing themselves from the cost of rent. Again, in my opinion this would probably only show in lower grade smaller offices.

We as valuers also need to stand strong around our values and our research, don’t be overly cautious nor aggressive, stick to the property fundamentals.

We have not lived through this before and therefore there is no precedent being set here. My crystal ball is a little hazy, but I do believe this will settle again and it will become one of our war stories.

Tracey Myers
SAIV President

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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