Rent collection by UK commercial landlords dipped in the first quarter of the year for the first time in two years in a worrying sign for investors who have looked to solid rents as one of the few bright spots in the outlook for the sector.
Landlords collected 63 per cent of the rent due in March by the end-of-quarter due date, according to data from Remit Consulting. The figure marked the first meaningful drop since the first year of the pandemic, and came after three quarters when collection held relatively steady between 67 and 69 per cent.
The dip at the start of the year threatens a recovery in rent payment from the depths of the Covid-19 pandemic at a time when commercial property is facing falling valuations due to rising interest rates and caution from key lenders following the turmoil at US and European banks.
“I’ve been in this business 30 years, and up until Covid the working assumption was that 97 per cent of the rent got paid on the quarter [due] date,” said Lawrence Hutchings, chief executive of shopping centre landlord Capital & Regional, who added that the rent collection for his company’s portfolio was back at pre-Covid levels.
The concern for investors is that the early indication of weakening rent collection could be the start of a downward trend, leaving them with less cash to cover rising debt costs and further imperilling property values.
“Payments of rent on the due date have been heading back towards pre-Covid levels until now, and collection levels had been gradually increasing each quarter since December 2020. This reversal in that trend is concerning,” said Elijah Lewis, research consultant at Remit Consulting.
Rent collection hit a low of 38 per cent in June 2020 when many businesses were shuttered during lockdown, and has never fully recovered. The highest post-Covid collection rate was 69 per cent in June 2022, compared to 75 per cent in March 2019. The trend has been partly driven by tenants taking longer to pay, and extending beyond the quarterly deadline.
The biggest drop in March payments came from retailers, who have been tightly managing their cash flow as they navigate higher costs for products, transport, energy and staff. Collection at retail properties fell from 71 per cent at the end of December to 62 per cent in March, according to Remit, whose figures are based on 125,000 leases on 31,500 properties around the UK.
“It wouldn’t surprise me if there are some companies that are feeling the pinch on their cash flow, and are looking to manage their rent payments a bit more carefully,” Hutchings said.
Rent collection was resilient in the industrial sector, which includes manufacturing and logistics warehouses, ticking up slightly in March. Warehouses remain a popular asset for investors betting on the popularity of ecommerce. US private equity group Blackstone earlier this month paid £700mn to buy out a UK-listed logistics landlord.
Richard Hart, head of property management at Workman, said the tick down in rent collection was “an area of concern” particularly when banks are nervous about business and real estate lending. “The spectre of insolvencies, particularly in the retail market, has certainly not disappeared,” he said.