​Shelley Sandzer: No more unicorns, cash is king

The longer the pandemic goes on, the greater the acceptance in the industry that life has to go on in some way. What is interesting, is the form that is taking. From our perspective, working for both landlords and operators, we are seeing a noticeable shift in the working relationship on both sides.

What and why has this happened?

In a fast-moving and uncertain world, landlords and tenants require flexibility and the ability to react quickly if things do not work out. This has meant the relationship between landlord and tenant has very quickly become more personal, thankfully moving beyond interactions derived from a quarterly rent demand paper with little or no social contact.

During lockdown, the responsibilities of asset managers at property companies and private landlords alike had to evolve. Project “get to know your tenant” was necessary in a way never seen or needed before. In many cases, rent was not being paid due to a forced closure or income had dropped off a cliff. Fear and uncertainty had taken hold of the market. At this point, the 3Cs were needed: communication, compromise and collaboration.

The old days…

During the 1990s, as the market began to expand, agents like us at Shelley Sandzer and property developers scoured the length and breadth of the country. We were looking for property to satisfy the requirements of the growing pack of restaurant and pub groups now being funded by a very thirsty bunch of private equity groups.

Pipeline was needed urgently. Vacant shops, banks, post offices and churches were sought for conversion. All were suddenly massively in demand from the likes of Pizza Express, Nando’s, All Bar One and Café Rouge. The list of operators just kept growing and growing, and investors took the market seriously for the first time. Buildings were purchased on the cheap, with F&B tenants signed-up paying a market rent on a 25-year lease.

The creation of this investment was the Holy Grail. The investment market liked the fact there were now numerous players in the market, long-term income was in place, and the property had been fitted-out at the tenant’s expense. The companies with the best finances were like unicorns.

Properties let to the likes of Carluccio’s, Côte, Slug & Lettuce and Byron, to name but a few, changed hands for huge sums and sold to institutions, private and overseas investors. An F&B investment now highly in demand, what possibly could go wrong?

Fast forward to autumn 2020 and the market is rather different. Most of these so called unicorn companies have undergone some form of restructuring, leading to a renegotiation of lease terms and rent holidays. Landlords are suffering the heavy losses. Where a CVA has taken place, many landlords have been left with unpaid rent bills and an empty property, one that may not be let again for some time as we are in the midst of the most difficult market in a generation.

What should the landlord do now?

Chasing the best covenant, pursuing unicorns with their 25-year leases, is no longer the Holy Grail. Understanding all aspects of your property and the tenant are now crucial. Doing business with the party you believe has a relevant proposition, has done its homework, and with whom you comfortable, is seen as a much more sensible approach. Rent deposits are now the favoured surety, rather than complicated bank guarantees or unicorns loaded with debt.

What’s changed?

Quick decisions on offers for units are now commonplace, even at the big property companies where pre-pandemic slow responses caused frustration because of layers of decision-making processes and red tape to go through.

Working with knowledgeable, hungry tenants, often using their own cash and not fuelled with unsustainable debt, taking shorter-term leases is becoming the new norm. The more enlightened landlords now see tenants as partners, rather than quarterly paper recipients with no face or social interaction.

This can only be a good thing and a much needed positive to take out of this extremely challenging year of negatives.