There is hope amidst the despair in hospitality if pragmatism wins out
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One is forgiven for being a little bleak about the prospects of the hospitality industry at the moment.
There is a general view amongst restaurant operators that the rest of 2020 will essentially be a write off in terms of trading. Reopening of food and beverage (F&B) businesses this year will be slow, gradual and staged.
Read more: Hospitality industry cries for help amidst lockdown
And being forced to close again having reopened once already would be so costly as to not be a viable option.
Most importantly, until a vaccine is found and it is generally considered completely safe again to be in close proximity to others, revenues will be very low as customers choose to stay away from crowded places lest they contract the virus themselves or risk passing it on to relatives who may be more vulnerable.
Looking ahead to 2021 it seems likely that without a vaccine this situation will continue, with staggered openings and possibly restricted occupancy – though most operators are forecasting a very slow improvement over the course of that year since there will be at least some income. Still, nobody is expecting to make a profit that would even start to pay back the enormous losses sustained in 2020. Many will decide to close for good during this time.
But will those who attempt to stay open be able to on their current tenancy deals?
Many tenants are looking for turnover-only rent deals during 2021 for the reason that fixed rents agreed prior to Covid-19 will bear little relationship to revenue.
In terms of consumer behaviour, there seems to be cautious optimism that a return to normality will resume next year, perhaps if a vaccine or other drug is found over the course of 2021 and an expectation from some that business will finally bounce back much as before, possibly even with an initial short uptick.
However, it is just as likely that a new and far weaker consumer environment will prevail, influenced by widespread redundancies and possibly very significant income,[ VAT delete ] and other tax increases that will be required to start to pay back the unprecedented levels of state borrowing. This reduction in disposable consumer income may well continue for far longer than the immediate effects of the pandemic. There are also the uncertainties due to the UK leaving the EU to contend with during that time.
In terms of the rental property market, there will have been countless casualties. Just in the last week or so, Carluccios, HIX, Le Pain Quotidien and others yet to be publicised are going to the wall and its likely there will be lots of independent businesses that will not survive either. The property market is already now being flooded with fully fitted restaurant stock and this unprecedented supply is being met by unprecedentedly low demand.
Nevertheless, agents and operators expect demand for sites to pick up very slowly over the course of the next 6-12 months as a minority of the more successful businesses get back on their feet and somehow manage to attract funding, in what is going to be a very difficult refinancing market, to enable them to take on new sites. But the demand is unlikely to rise sufficiently to meet the level of supply which we expect to continue rising over the same period. Current rents will in many cases look very high and some leases will be terminated or renegotiated, with new leases being agreed at lower levels than had been the case previously. In addition, some landlords will have to accept extended void periods in a market swamped with good quality stock, rent free periods well in excess of the usual six-12 months and other incentives.
There is an initiative being put forward by the hospitality industry, with support from UK Hospitality, the Music Venue Trust, the NTIA, UK Active and other trade bodies, which would see a nine month rent free period (March-December 2020) with a commensurate moratorium of debt enforcement by lenders. Crucially this does not involve any new state funding; just some new legislation. Essentially the payment of rents is postponed, landlord enforcements are suspended and action by lenders against landlords is suspended. Leases and landlords’ arrangements with lenders are extended by the corresponding nine months. This scheme would appear to prevent many of these businesses from going bust, and save the landlords from fishing for new tenants in a diminished pool.
Looking Ahead
As well as future leases containing clauses that address the prospect of this sort of thing happening again, it is quite possible that this pandemic will leave a wider legacy.
It is possible that some features of the restaurant property leasing market that have been on the fringe for some time will become more commonplace because they would seem to address at least some of the challenges that will be present in the immediate aftermath of the crisis.
These include rents linked to turnover, index-linked or turnover-linked rent reviews, a long-awaited review of the despised business rates system for high street property , and in some cases greater landlord participation in the cost of fitting out sites, perhaps, as a quid pro quo, with improved flexibility and autonomy benefitting landlords and developers.
In summary, there’s going to be a lot of pain over the next 12-18 months, but some of that could be alleviated by the various stakeholders including lenders and government taking a pragmatic stance. In the longer run we may find ourselves operating in a more dynamic and agile property leasing environment which maybe isn’t such a bad thing.