Commercial property tenants arrears still growing
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AS THE dust settles on the destruction to the country’s shopping malls, property owners are counting the cost in addition to the R3 billion in rent relief they provided from April to June last year that significantly reduced the number of tenants who were more than three months in arrears.
Fast-forward nine months and the R3bn has been swallowed up – and arrears continue to grow.
TPN Credit Bureau’s Commercial Property Rental Monitor for the first quarter of this year showed that in KwaZulu-Natal and Gauteng, the melting pots of the current destruction, commercial tenants were already lagging as regards being classified “in good standing” with their rental payments, with Gauteng tenants at 59.79 percent in good standing and those in KwaZulu-Natal at 59.79 percent.
The report considers the recovery in the first quarter after the massive impact of 2020’s lockdown restrictions, looking at how tenants are behaving when it comes to paying rent.
Tenants in good standing increased in the first quarter, but the question was what the impact of the third wave would be on the country’s commercial property sector.
The report said the hard lockdown during the second quarter of last year left landlords reeling, with one in two tenants crashing into delinquency.
Tenants in the “did not pay” category increased from 6 to 7 percent before the pandemic to one in five, before recovering to 12 percent in the past three quarters.
“Recovery in the non-payment tenant category seems to have stalled at 12 percent.
Tenants in the “partial paid” category also doubled in the hard lockdown quarter from 14 percent prior to the pandemic to one in three tenants unable to make full payment of rent.
“Recovery for this partial paid segment is more muted as tenants slowly catch up deferral arrangements, dropping to 26.09 percent by the end of 2020, with further improvement to 24.65 percent in the first quarter of 2021,” said Michelle Dickens, the chief executive of TPN Credit Bureau.
Dickens said managing tenant arrears required an ongoing strategy, and the length of tenant delinquency was significant. Landlords will be focused on the 13.5 percent of delinquent tenants who are now more than six months in arrears.
Overall, tenants who were more than two months in arrears had increased from 54.4 percent to 63.6 percent, while less risky were the 26.4 percent of delinquent tenants who were less than a month in arrears.
She said that commercial tenants segmented into monthly rental price “buckets” were equally stressed, with those paying below R10 000 a month 60.37 percent in good standing, and tenants paying between R10 000 and R25 000 at 63.44 percent and those paying between R25 000 and R50 000 a month at 63.77 percent.
Commercial tenants paying more than R50 000 a month were only slightly better, with 64.64 percent in good standing.
“Commercial real estate recovery relies on business recovery.
“Constraints to business productivity as a consequence of work from home, coupled with home schooling as schools remain partially open – particularly in the public school environment – have been significant.
“Curfews and electricity constraints are additional factors limiting recovery.
“The broader vaccination roll-out to the education market and over-50 age group is certainly a step in the right direction,” Dickens said.
A total of 3 246 businesses have entered business rescue since the Companies Act provided for this mechanism 10 years ago.
For the pandemic so far, 442 businesses had entered business rescue, with the rent often renegotiated as part of the business rescue plan, adding pressure to the commercial real estate sector. Unlike business rescue, where business recovery was the objective, business liquidation was the end of the road for a failed business.
Business liquidations peaked in 2002/3 and again in the post-global financial crisis (GFC) period of 2009.
There was another clear spike in liquidations, and given the lag of liquidations after the GFC, more failed businesses were expected in the coming months and quarters.
So far, 2 275 businesses have been liquidated since the shock of the hard lockdown in April last year.