Commercial code: looking ahead

How will the conclusion of the emergency period under the Commercial Tenancies Act impact rents and vacancies across office and retail portfolios?

Lavan Legal partner, property and leasing, Peter Beekink is quick to point out how the property sector was the only sector mandated by legislation to provide support during the COVID period. 

And Mr Beekink says it’s about time the industry returned to a state where the market determined the playing field.

The Commercial Tenancies (COVID-19 Response) Act 2020 was introduced in March 2020 to soften the potential economic blow of the pandemic on business, which included the WA Code of Conduct, a moratorium on evictions and freeze on rent increases.

Initially legislated until the end of September 2020, the temporary commercial tenancy laws were extended, with some changes, until March 28 2021.

The extension came at a time when property groups and landlords were lobbying for the rent assistance measures to be wound back, with one study estimating the property sector had already outlaid an estimated $4 billion between March and September.

The study was undertaken by Deloitte Access Economics and commissioned by the Property Council of Australia.

Mr Beekink said the cost of that support was not only borne by property landlords, but also by shareholders and superannuation funds.

“Apart from a few sectors (such as tourism) most sectors have adjusted to the current situation and are ready to operate without JobKeeper,” Mr Beekink told Business News.  

“There are a significant number of businesses that have used JobKeeper to boost their bottom-line result.

“History shows that where a restraint is put on costs, there is a very quick move back to the market position when the restraint is lifted; the longer the restraint remains in place, the more dramatic the adjustment.”

Over the past year Mr Beekink said he had dealt with only a small number of requests for rental relief, from both the landlord and tenant perspective.

While the emergency period under the commercial code has now ended, tenants are still able to make a request for rent relief or start dispute resolution under the Act up until May 27.

“I am aware that a significant number of applications have been made to the State Administrative Tribunal to deal with negotiations that have not been able to be concluded,” Mr Beekink said.

“I would expect the vast majority of these cases to be settled in the mediation process.

“My advice is that accommodations reached in the COVID environment need to be properly documented.  Agreements could have been reached on a fairly informal basis (such as email exchange or letter). 

“Landlords and tenants need to give consideration as to how these COVID arrangements are to be dealt with if the landlord sells the land or the tenant sells its business.”

Mr Beekink said that had been a significant issue with the buying and selling of shopping centres.

“Business brokers and leasing agents need to give considerable thought as to how these issues are to be dealt with in sale and assignment situations,” he said.

“I don’t think there will be much further impact on rents with the ending of the commercial code - the rents are determined by economic circumstances.

“There is significant office space coming to the market over the next 2-3 years.  The developers of these sites are offering significant incentives to attract tenants… putting a dampener on rent increases.

“This will have a flow on effect.”

Office impact

Landlord Redhill Partners has spent the past year working with its tenants to tailor outcomes to suit both parties as a result of requests for rental relief under the commercial code.

The Singaporean-based private investment company is one of the top 10 largest commercial property owners in Perth, ranked by total lettable square metres via the Business News Data & Insights list.

The group’s portfolio includes 28 The Esplanade, 45 St Georges Terrace and Dynon Plaza, an A-grade 14-storey office building with three adjacent heritage properties, which it purchased for $67.8 million earlier this year.

Redhill Partners investment manager Daniel Johnston said after working with tenants through the early stages of the pandemic, it was evident the impact to their business was not as bad as first predicted.  

“We experienced over 98 per cent of gross collections over the portfolio during 2020, which is a credit to our management team and to our tenants for working together during a difficult time,” Mr Johnston told Business News.  

“We only have one tenant of 55 in our portfolio still claiming relief with all but one not reapplying for Job Keeper 2.0.

“We have had multiple tenants in our portfolio take more space and it is evident that the Perth market has rebounded to pre-COVID levels or even better.

“The majority of tenants who took up the relief during the middle of the pandemic are now in a position to pay down the deferred rent portion, which is a good sign.”

Mr Johnston said as Perth still had the highest office vacancy rate in the country, it would take some time for incentives to decrease and face rents to increase, but the market was on the right track to experience growth in the medium-term.

“We are only noticing positives signs in the market at the moment with strong leasing enquiry and tenants willing to commit to new leases instead of short-term renewals, which was the trend during the middle of the pandemic last year,” he said.

“There is still a lot of capital chasing Perth office assets, particularly stabilised assets given expectations of low interest rates until 2024.

“Redhill Partners believe the office of the future has to become a destination with a purpose, and will be designed with an increased focus on collaboration, with potentially more individual style work completed from home.”

The group has now commenced an extensive capital expenditure program of Dynon Plaza, which settled this week.

That involves removing the ACP and replacing it with compliant façade cladding, as well as a revamp of the lobby and end-of-trip facility upgrades.

“Perth is coming off a low base compared to other global cities, combining this with evidence of rising commodity prices, we believe Perth is set to come out of COVID in a better position than pre-COVID,” Mr Johnston said.

Concern for retail tenants

Burgess Rawson director of retail property management Cameron Hopkins said with the ending of the moratorium coinciding with the ending of JobKeeper payments, some retailers would certainly feel the pinch.

“We will see some zombie companies propped up by JobKeeper payments come under threat of insolvency when these payments are withdrawn,” Mr Hopkins told Business News.

“We think the numbers will be quite small, however nonetheless we will see some tenants struggle to pay the rent without JobKeeper support and so it is inevitable there will be a small rise in vacancies.

“Many landlords have already provided a lot of relief, carrying the burden more so than any other asset class, so some may seek to replace struggling tenants.

“As we don’t expect this to apply to significant numbers we don’t envisage any adverse impact on rents and certainly capital values could only improve as landlords have their rights returned to them.”

Mr Hopkins said the team was initially inundated with tenants seeking relief during the first quarter of 2020, but that it had settled down by the second quarter.

“Now we would be dealing with less than 1 per cent of the portfolio impacted,” he said.

“Retail was worst affected due to forced closures however we have been very fortunate in Perth to have had COVID under control allowing the shops to reopen and for most to trade quite normally. 

“Obviously travel related businesses, CBD retail and food and beverage operators with relatively small dining spaces have continued to be impacted.”

Mr Hopkins said he didn’t expect a rush of lease terminations following the ending of the code, with most landlords having worked with tenants to understand their businesses better, brought about by the requirement to provide financial information under the COVID rent relief legislation.

“The open and honest information exchange and the need to deep dive for landlords and their managing agents to understand their tenants’ businesses better is likely to improve landlord-tenant relations longer term,” he said.

“However, there will be the exception to the rule where someone hasn’t conducted their business affairs openly and honestly, seeking instead to exploit the protections afforded by the Act.

“With the removal of prohibited actions, we might see a few of these situations brought to a head.  

“Landlords or their managing agents really need to engage with their tenants to ensure they understand whether there are any ongoing adverse impacts from COVID.”

That included considering potential margin squeezes brought about by higher costs of goods sold, or higher staffing costs, due to the lack of overseas migrant movement. 

Last year a Shopping Centre Council of Australia (SCCA) survey found its members had contributed about $1.6 billion worth of rental assistance nationwide to retailers between January and September, with WA representing about $100 million of that support.

“Landlords took on a disproportionate amount of the burden of supporting the economy through COVID and given we are hardly impacted by it at all now they should have their rights returned,” Mr Hopkins said.

“We now need to allow free market forces to apply.”