Well, we are well past the first full quarter day during the COVID-19 crisis. Who would have thought at the beginning of the last quarter where we would be now. There have been many substantiated and unsubstantiated good news and bad news storeys but it is clear that whilst some occupiers under commercial leases are playing fair, others may not be.
The hotel and university sectors are absolutely in the front line both facing huge but quite different challenges. Across the country, hotels have largely been forced to shut down in order to comply with the Government’s new restrictions which came into force on the 24th March, with the exception of critical locations across the country to support keyworkers. These include main cities and in particular around transport hubs and hospitals. Indeed, some hotels are being turned in to temporary hotels and refuge for the homeless.
With such a dramatic loss of income, many are now clinging on for survival in the hope the crisis will not last more than a few months. As a result, many have not paid their March quarter’s rent however a few exceptions have including Premier Inn. This is a highly commendable approach adopted by PI but possibly stems from the fact that the virus only began having a significant impact in the second half of the quarter which up until then it was business as usual and so by and large earnings from that quarter should have been largely unaffected and so rents could have been paid. The question has to be asked though, why have some very well known companies refused to pay their rent this quarter, when other similar companies managed to do so.
Indeed, some of those companies that refused to pay have massive financial backers and should arguably have continued as normal – perhaps reconsidering their positions for the next quarter day after a greater extent of the shock is known. Not paying rent is not without its consequences for companies and individuals. It might help preserve cash for some that don’t necessarily need help, at the expense of others, notably the pension funds that have bought into the sector massively over the last two decades. They have pensions to pay out and growth to make – this affects most of us. Memories are long and investors will remember those who did their best not to take advantage of the situation and those who chose to. With the long-term income investor appetite still strong, when it comes to a choice as to who to invest in, in the future, there will be clear favourites which may well be reflected in yields.
For the university sector, the crisis is all consuming. It took a while but in the end all of them closed in the second half of March with many continuing with their courses on-line as much as possible at least for this term. We have no hard evidence however we suspect that by and large first and second year students will have finished or be finishing their years by now and so many will have gone home and be even greater experts shortly at gaming! Others though, perhaps most notably final year students and in particular in hands on subjects such as chemistry and physics, which involve lab work, will be more concerned. Setting exams which normally require practical tasks will be difficult to administer however many final year students will want to stay on in their digs whether PBSA or HMO to finish critical coursework, perhaps with fellow students and so the picture of who is still in their students homes is less clear however on speaking to a close associate operator, we think the current occupancy rate is in the region of about 40% spread across the sector.
As the PBSA sector predominantly attracts international, final and post grads students, many are still in occupation but hopefully learning to live in isolation in line with government policy and we expect most providers are acting responsibly in the advice given to their young adults. Some operators, such as Unite have generously made a decision to allow students to forego paying next terms rent, despite the short term pain this has created. Such owner operators, frequently publicly owned, can act in isolation and make these decisions for themselves and the goodwill they will earn should not go unforgotten. Others in the sector, notably the pure operators are having to deal on a site by site basis withmany of the owners they operate on behalf of not agreeing to waive rents. To be fair, one size does not fit all, some will have huge debts which will need servicing and so may not be able to be so altruistic – imagine this being your first investment venture into the sector! Others have deeper pockets and will perhaps be taking a longer-term view and see benefit in being seen as perhaps more understanding.
For the future, universities rely so heavily on international students and will need to attract them and as time goes by our hunch is that things will return to normal and they will still come, attracted by some of the world’s best names and the facilities they offer. The value of a world-renowned university education is unlikely to diminish and indeed could grow stronger. Universities will do all they can to maintain this income flow and sources tell me that inquiries for next year are not as impacted as you might think. Unless they fail to re-open for the new academic year, we would anticipate that most students plans won’t change, 6th formers will commence their student life and returners will return opting for the same types of accommodation they have traditionally gone for, namely PBSA or HMO. If I were a prospective renter student in either the HMO or PBSA sector, one of the first questions I would ask to prospective landlords, and seek clarity on is, what did you do for your tenants during the virus. With no certainty at the moment that this won’t come back again next year, one would supposedly wish to see a benevolent track record.
There will be winners and losers as usual.