By Tom Beak, Senior Associate, Kingsley Napley’s (www.kingsleynapley.co.uk)
The past year has seen the Hotel, Pub and Restaurant sector of the hospitality industry continue to recover from the impact of the COVID-19 pandemic. Whilst some areas of the market (e.g. hotel occupancy in London) are yet to reach pre-pandemic levels of performance, the forecast was improving and figures were heading in the right direction. However, recent weeks have seen a significant mood change amongst forecasters, both in the hospitality industry and the property market.
The combined impact of Brexit and COVID-19 has been exacerbated by a global economic downturn caused by Russia’s invasion of Ukraine. Whilst operating costs, labour shortages and supply chain issues have provided a constant challenge for the hospitality sector, the industry’s consumers are also now feeling the pinch due to the “cost of living” crisis. Such a variety of challenges meant that reports of recession and property market crashes were of no surprise, however the general consensus seemed to focus on a slow decline. That was until the government’s “mini budget”.
The fallout from this has been an acceleration in concern. Economic turmoil has followed and the property market has reacted. However, there are already rumours that the government will revisit (or, dare I say it, U-turn entirely) their “mini-budget” and a successful revision may well steady the market. Indeed, changes have been so frequent that this article may be outdated by the time it is published!
Whilst we wait to see what impact further government announcements will have, it is worth exploring what (if any) opportunities are presented by uncertainty in the property market and the role your commercial property lawyer can play in navigating such opportunities.
In its most basic terms, the current concern in the property market is twofold:
1. Difficulty in funding – huge increases in interest rates mean that borrowing is not a viable option for many businesses – either by making it difficult for borrowers to seek funding or by making it impossible to refinance when existing loans mature, forcing borrowers to sell their property assets; and
2. Decreasing value of assets – as the cost of borrowing increases, property prices react by falling (Goldman Sachs recently predicted a fall of 15-20% by the end of 2024).
If these trends continue and the economy remains (at best) unstable, the following property opportunities may arise:
A. Rent Negotiation
As we saw during the pandemic, in times of economic downturn, landlords are willing to negotiate rent – it being generally accepted that it is better to agree alternative arrangements with existing tenants than be left with an empty property.
For existing tenants, there may be the opportunity to negotiate rent on lease renewal or to agree rent concessions or deferrals mid-term. Whilst bargaining power shifts somewhat with each business, Superdry’s recent report (which confirmed that of the 55 lease renegotiations completed in the last financial year, they saw an average rent reduction of 45%) shows that there is willingness to negotiate down.
Landlords may also be more willing to accept turnover rents, whereby the landlord agrees to let at a decreased base rent, accepting the incentive of a profit share if a certain turnover is achieved.
B. Private Investment
As traditional funding becomes harder to come by (with banks being unwilling to lend or offering unpalatable interest rates), opportunity is presented to so-called “adventurous” investors. Private investors, attracted by decreasing property prices, may seek to capitalise by offering private funding at competitive interest rates.
C. New Sites
If existing property owners are unable to refinance, it is expected that they will seek to offload property assets. This means that there may well be an increase in commercial property on the market at a reduced price. Those in the hospitality sector, particularly those looking for more consumer-friendly locations or to downsize, may well find the opportunity to explore new commercial space. For example, Estates Gazette recently reported that Premier Inn has opened hotels in sites that formerly operated as offices, department stores and hospitals.
As business opportunities become harder to come by and the need to avert risk greater than ever, a collaborative approach with your commercial property lawyer is a must. The more involved your legal advisor can be, the greater understanding they will have of your business (rather than just a general familiarity with the industry) and the more tailored their advice can be to your specific business needs. Ensuring that your lawyer is involved from the ‘idea’ stage is vital – including your legal advisor in early due diligence and negotiation of key terms ensures that common pitfalls are dealt with in detailed heads of terms, helping to avoid later dispute that adds delay and cost to transactions.
In addition, your legal advisor should be an invaluable conduit to the property industry – having real time insight into market trends and concessions made in on-going transactions, as well as contacts amongst agents, landlords, planning consultants, tax advisors and private investors. Bringing your lawyer on board from an early stage, ensuring they know your business and your business plan, can ensure that value is added when it is needed most.
Whilst this discussion of opportunities may be overly simplistic or optimistic, the hospitality industry’s resilience and willingness to be flexible, as displayed during the pandemic, suggests that such optimism is not misplaced. Though the immediate forecast for both the economy and the property market is bleak, opportunities can be found and your legal advisor should be one of your most valuable assets, not a hindrance to realising these opportunities.
Tom is a Senior Associate in Kingsley Napley’s Real Estate team and advises clients on a variety of commercial transactions, including hotel and restaurant developments. Tom has acted for developers, investors, high net worth individuals, landlords and tenants, with particular expertise on the acquisition and disposal of development property and the refinancing of property portfolios.
