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Rent collection: Investors’ patience is being tested

There are two question marks over the UK market, experts agreed at Real Asset Media’s online briefing: Is the UK still OK? Covid-19, Brexit and the Property Markets.

The first is about investor appetite over the longer term. “The real attraction of real estate for most investors is the level of income compared to other asset classes, because it provides returns you can’t get anywhere else,” said Tony Brown, global head of real estate, M&G Real Estate.

“But if rents continue to be unpaid for a long period of time, investors’ perception could change and they could question whether the risk premium for real estate is appropriate or not,” he added.

Institutional investors have been patient until now, with pension funds retaining, and in some cases even increasing, their allocations to UK real estate.

The cashflow crisis due to non-payment of rents has been seen as a temporary problem that will be overcome, but it cannot go on for too long. “Long-term investors are patient, but up to a point,” said Brown. “I see this as the biggest risk.”

The other question mark is over continuing Government support to long-lease covenant products, given the economic slowdown and increased, record levels of debt incurred in the last few months to finance employment support schemes.

“Government-supported covenants have been positive for the UK market,” said Mark Haywood, Partner, CMS. “Many schemes have been underpinned by some mix of income strip lease commitment, prudential borrowing or old-fashioned grant funding. The question now is will it continue or will the purse-strings be drawn because of financial constraints?”

Local authorities taking 35-40 year leases has been a good system for pension funds, which have appreciated inflation-linked cash flows over a long period of time.

“Thanks to this support we’ve been able to fund regeneration schemes in the North of England, even in zones with low economic activity,” said Brown. “There is huge demand from domestic pension funds still for that type of product if we can get the structures put together with government bodies, so it will be quite important over the next few years.”