COMMENT As the effects of the coronavirus are felt across the real estate industry, lenders have been faced with a deluge of enquiries from commercial borrowers negotiating covenant waivers. In some cases, lenders have had to redeploy and train staff to deal with such enquiries while at the same time – and like businesses throughout the UK – adjusting to home-working principles and varying their operations accordingly.
For landlords, these forbearance requests are largely necessitated by a drop in rent collection, particularly at the March quarter day, as tenants experience extreme liquidity pressures. Arguably, the government’s decision to preclude landlords from evicting tenants may have had the unintended consequence of putting landlords in breach of their loan agreements, as tenants rely on this short-term protection.
The type and nature of tenants failing to pay rent appears wide-ranging, from those directly impacted by the pandemic due to enforced closures – retail, leisure and those already having fallen into administration – through to large-scale office and industrial tenants who, only six weeks ago, might have been regarded as prime covenants. By extension, a huge variety of landlords, from single-asset investors to portfolio landlords, will be impacted, as will their lenders, from alternative bridging though to insurance lenders.
The stagnant market as a result of Covid-19 will have an impact too, with loan maturity breaches occurring where sales and refinance strategies have failed or stalled, as buyers and valuers alike are unable to inspect property. It is too early to understand true value implications, but loan-to-value covenants will inevitably become a pressure point in some sectors in the near future.
Rising enforcements
The overwhelming feedback we are hearing is that lenders are supporting their borrowers during this extremely sensitive time by agreeing to capital repayment and/or interest payment holidays, extensions where required and other waivers across debt service covenants.
As a result, we expect a reduction in loan enforcements in the short term. This comes as lenders balance reputational considerations – even for connections with a default pre-dating Covid-19 – with operational adjustments and, in part, the practicalities of how a receiver can deal with certain assets at this time, including their sale.
While Duff & Phelps continues to transact property, both legacy deals and those agreed in recent weeks, overall sales volumes are substantially down across the industry; evidenced by recent property auction results representing an incredibly useful barometer of the current market.
Inevitably, however, as the markets start to free and reputational considerations either subside or are substantially offset by potential losses as the effects of the pandemic are quantified, enforcements are expected to increase.
Pre-emptive dialogue
Lenders should be able to absorb what are currently short-term amendments to facilities, although some will be better placed than others.
Debt funds might be well positioned since they are typically closed-ended and do not face immediate pressure from investors, allowing a more fluid approach, whereas if insurance lenders offer adjustments to loan terms they forfeit their capital relief, which can be costly.
Banks are reportedly well capitalised and the Bank of England recently cancelled 2020 stress tests for the UK’s biggest lenders, allowing them to be more accommodating and continue to write loans.
Greater difficulties could lie ahead however, particularly if the hiatus of transactional, construction and business activity continues into and beyond the summer and escalating concessions are demanded by an increasing number of borrowers.
With potentially deteriorating positions across larger tranches of loan books, alternative lenders who rely on stringent funding lines could be most exposed, with an increased prospect of breaching covenants themselves.
A quick return to normality will therefore be welcomed by investors, developers and lenders, but until then, all loan parties will benefit from open and pre-emptive dialogue to navigate what are difficult times for most.
James Liddiment is managing director of the real estate advisory group at Duff & Phelps
