More compromise is needed
This article was first published by CoStar on 31 July 2020
Duncan Lillie, partner, Shelley Sandzer professional services
The reopening of the F&B sector was epitomised by scenes of overcrowded pub and bars. Not unsurprisingly, however, the picture was a little different for restaurants. Far fewer reported a bumper re-opening, with customers having mixed experiences due mainly to the need to be compliant with Covid-19 related regulations.
Duncan Lillie, partner, Shelley Sandzer professional services
As time goes on, the sector is now generally recording disappointing turnover levels and reduced future bookings as consumer confidence takes more time to rebuild than many perhaps imagined. It will be interesting to see whether the government’s ‘Eat Out to Help Out’ campaign is the shot of adrenaline the sector is hoping it will be.
The sector is working hard to reduce its cost base to increase profitability, and viability, but the need to maintain brand integrity means cost cutting is problematic. Coupled with reduced income, the sector faces enormous challenges throughout the rest of 2020 and potentially into Q1 and Q2 2021. It is not until 2022, and in some cases early 2023, that pubs and restaurants in particular are likely to see a return to pre Covid-19 profit levels.
The situation is not being helped by the government, which has done little, if anything, to ease the plight of landlords exposed to the F&B sector. They are still faced with the challenges of servicing their own debt while maintaining their share value, and paying their staff and suppliers. In turn, this is increasing the pressure on operators as many landlords simply have little room to manoeuvre.
During lockdown, we advocated 3Cs that should come to the fore: collaboration; cooperation and compromise. It is encouraging to see they have been embraced, leading to the lessoning of some of the unhelpful rhetoric prevalent at the commencement of lockdown.
Trends have emerged with prime London areas seeing rental deferments, with some landlords agreeing to rent free periods. Elsewhere, short-term base rent and turnover arrangements are being entered into until 2022/2023. The rent invariably returns to 2019 levels in 2023, or to an average of the base and turnover rent for the proceeding two years. For many on both sides, the newfound collaboration and cooperation is the difference between success or failure; surviving or closing.
The one ‘C’ that remains a challenge in some cases though is compromise.
Many landlords are to be applauded for responding positively to operators’ willingness to share their financial information by restructuring leases. This has enabled tenants to enact their recovery plans while providing the landlords with a return on their short-term financial assistance once the business has recovered.
Others still find it difficult to assist their tenants in formulating a recovery plan though. Most are now offering deferred rental payments, although there is a greater need for longer repayment periods so the rent can be accommodated in the tenants’ cashflow forecasts.
Landlords need to be confident in the sustainability of their tenant’s business, which comes from the tenant’s willingness to share their financial forecasts. If that confidence is there, then more innovative solutions are to be encouraged based on the trading profile. Deals are now being agreed that potentially produce rents comfortably in excess of 2019 levels following short-term rental assistance until 2022/2023. This is a win-win scenario for all concerned.
Where there is a desire to compromise there is less conflict between landlords and tenants, leading to better outcomes for both parties. We need to see such compromise much more widespread though if the chances of the industry thriving once again, and individual operators and landlords surviving, are to be increased. So please, can we add compromise to the collaboration and cooperation we have already embraced.