Time to cleanse more than the virus

COMMENT Like a plague of locusts, Covid-19 has created human and economic carnage on a scale even Moses would have struggled to imagine. Its consequences are far reaching. How we work, rest, play and shop has changed, and quickly. Trends that may have taken 5-10 years to work through have happened in five months. For perfectly sensible and obvious reasons real estate is not a sector best known for its ability to adapt quickly. Both owners and occupiers are struggling to understand what this “new normal” means for their business model. What is clear is that the occupiers we and others speak to require greater flexibility, as well as cost structures that better suit their emerging business model. Retail and leisure is at the heart of this shift, but offices also face a potential tsunami of change as well. To meet these challenges many good suggestions have been made; and some less so. As EG research has shown, the “owner” is typically the public, not  some form of modern-day Rachman, as some would paint. But of the more constructive ideas, typical among them have been the suggestion of wider use of turnover leases; profit-sharing models; fixed and flexible rents; shorter leases and no upward only rent reviews. I have yet to hear a tenant say they their first choice of rental deal is to be linked to whatever someone adjacent to them is going to pay. They couldn’t give two hoots what a different business can afford; it’s their business they are focused on. Owners, on the other hand, need to understand their forward-looking cash flow, as do the banks and valuers who support it. Flexibility does bring uncertainty, but inevitably that gets reflected in the price. So with the provision of information to understand the business model of the occupier, it is perfectly possible to strike deals that meet both sides’ objectives. And if we do have all this space that needs repurposing (and we do), then shorter leases should allow for regeneration to happen, and happen quickly. We don’t operate in a free market Like water, free markets are quick to find their level and adjust accordingly. But we don’t operate in a free market. Legislation written before most of us were born, and for reasons long lost in the mist of time, tie owners’ hands. The very freedom to strike deals that have nothing to do with what an adjacent business can pay is hampered. The Landlord and Tenant Act 1954 gives occupiers a choice. They can negotiate a renewal with the owner or, failing that, can also run the argument of comparison rents. One that supports an army of consultants, takes time and is costly. So in seeking to give occupiers the flexibility they want, an owner then faces a renewal with an occupier who can fall back on the comparison method; and then walk if they don’t like it. Then, if the owner wants to regenerate, they face a lengthy legal process and compensation that often exceeds the total rent ever paid due to the absurdity of the rates system. So, in all the rhetoric spoken by some occupiers pushing for more flexibility, let’s also hear them speak up about removing the very block that prevents this. If as an industry we really are to change quickly and give occupiers what they want, we need to scrap outdated legislation. Like Covid-19, let’s give it a deep clean and eradicate it. Mark Williams is executive director at RivingtonHark