Receivership and Recovery Solutions

The rapid adoption of hybrid working has fundamentally changed the way in which we use our workplaces. Arguably this will result in structural changes within the office sector, with tenants reassessing their workplace requirements often concluding a need for more flexibility and less floor space. When making decisions to take new accommodation, the market is witnessing tenants focussing on those offices which offer the best specification, location and ESG credentials. This increasing polarisation means that the highest quality buildings will be best placed to weather recessionary events. The rest will face uncertainty of prolonged rental voids, declining rental values and increasing capital expenditure if they are to compete with prime.  The flight to quality has never been more apparent.

Key issues

• Upcoming MEES regulations require all new and existing let properties to have a minimum EPC rating of E from 1 April 2023. There is currently ongoing consultation to raise the bar further to a minimum of C by April 2027 and to B by April 2030. This will result in a number of properties becoming unlettable or requiring extensive and costly refurbishment to achieve MEES compliance. A recent study showed that only c.10% of UK non-domestic properties currently enjoy an EPC rating of B or above.
• Locational obsolescence is coming into play, with offices situated some distance from transport hubs and complimentary offerings such as food & beverage outlets or attractive centres to pursue leisure activities, witnessing declining occupier demand.
• Specification requirements of occupiers have never been more important. ESG credentials are at the top of the list, but also creating an inviting environment that addresses a much wider range of requirements, to include well-being in addition to end of journey facilities such as cycle and showering facilities.
• Prolonged voids will now have a greater impact on landlord’s net income. Service charge costs are increasing, driven by increased energy prices, labour shortages and landlords’ requirements to spend on enhanced specification to remain competitive.
• Increasing debt costs are putting a strain on landlords returns at the point of refinance. Those lenders that consider new refinance opportunities are studying cashflows forensically. And with an increasing focus on interest cover, many borrowers could be left with few refinancing options.

What to do about this now

• Assess the energy performance of the property to understand what is required to achieve MEES compliance and how this cost can be met. Does the borrower have a plan to achieve impending and future MEES requirements? Is there tenant buy-in/participation?
• Consider alternative uses if the property is moving further away from prime. Is there a credible option for redevelopment that can help drive an enhanced capital receipt?
• Proactively review tenant covenants alongside lease events and target these early to help enhance security of income. Challenge tenants to consider whether their space is being utilised efficiently, or whether they will be looking to downsize at the next opportunity. Early engagement and a recognition of issues may provide the time to reprofile the property.
• Consider incentives to attract and retain tenants where necessary. A short-term rent-free period or reduced rent to secure occupation is likely to be preferred to a longer void period.
• What’s the exit strategy? Obtain a current property value to understand any challenges around refinancing and the profile of prospective purchasers. Would a sale prior to a break option or lease expiry be preferable now, mitigating the loss through value erosion closer to these events?

How can Cushman & Wakefield help

Our Receivership & Recovery Solutions team regularly provides strategic advice to lenders, insolvency practitioners, corporate and equity fund clients on challenged properties.

Solutions we can offer include providing third party impartial advice to ensure that the right strategy is being followed.

We can obtain accurate, up-to-date views on pricing, utilising our expert valuers and specialist capital markets teams.

We have particular experience in dealing with multi-let and mixed-use developments across the UK having been appointed on cases of office buildings multi let to a range of occupiers and those single let or with additional retail and/or residential uses. 

If you are experiencing any issues in this sector and would benefit from further advice, please get in touch for an informal confidential discussion. 

Continued house price growth through the pandemic has been matched by record rental increases, making headlines in recent months and pointing towards an ongoing lack of supply set against continued demand. However, a number of key issues are lurking and having a profound effect on traditional buy to let landlords. Interest rates have rocketed in recent weeks, creating challenges to borrowers seeking to refinance. Regulation has gradually been tightening including the soon to be enacted Renting Homes Act and more stringent EPC requirements to achieve MEES compliance. Against this backdrop, institutional investors have an increasing appetite to develop well specified, purpose-built apartments in the shape of Build to Rent schemes. This adds another layer of competition to landlords of traditional small to mid-size buy to let residential property portfolios.  

Key issues

• Competition is rife from institutional investors seeking returns from the opportunity to build modern Build to Rent schemes at scale that are increasingly catering for a broader range of occupiers. How will landlords of traditional, typically older housing stock compete with well-located modern accommodation offering the best ESG credentials and facilities such as private dining, roof top terraces and on-site gymnasiums?
• Government regulation in the form of Renting Homes (Wales) Act, due in December and the likely equivalent for England are causing landlords to seek expert advice and instructing managing agents often reducing net income. Or taking the option to sell the property with tenants in situ, potentially at a reduced capital receipt to a vacant possession sale. 
• MEES regulations are set to tighten and many properties, especially older stock, are poorly positioned to achieve compliance without extensive and costly improvement works. If the property is not MEES compliant then it will be unlawful to let it and could be regarded as unsuitable for a mortgage advance.
• Rising interest rates is a common issue across all sectors which is having a profound effect on the buy-to-let sector, with many lenders withdrawing products from the market whilst they reprice to adjust for a volatile financial market. Landlords requiring new finance are finding this is far harder to secure and considerably more expensive, adding to the pressures on net returns. 

What to do about this now

• Understand how the property competes in its peer group, both at a local and regional level. What is the borrower’s plan to maintain occupancy? Has required capital expenditure been budgeted for?
• Review rental income undertaking a sensitivity analysis to assess whether increased operating costs, higher interest rates and capital expenditure for compliance with regulations can be absorbed. If not, has the landlord got deep enough pockets to cover a negative cash flow in the short term? 
• Ensure that appropriate licences, legal occupational agreements and notices are in place, up to date and served correctly where required, along with health and safety requirements such as gas certificates and electric tests (EICR). The presence of the correct documentation will save time and be critical to ensuring optimum capital receipts are secured at point of sale. 
• Assess the energy performance of the property to understand what is required to meet MEES regulations and how this cost can be met. Does the borrower have a plan to achieve impending and future MEES requirements? How will this be carried-out when tenants are in situ? What will the cost be?
• What is the exit strategy? Review exit values and strategy. Would an early exit be preferable before increasing operational costs and interest rates erode value? This could provide certainty in a market which is likely to soften.  Moreover, would a sale with vacant possession achieve higher capital receipts? How long will it take and how challenging will it be to achieve vacant possession?  

How can Cushman & Wakefield help

Our Receivership & Recovery Solutions team regularly provides strategic advice to lenders, insolvency practitioners, corporate and equity fund clients on the above scenarios.

Solutions we can offer include providing third party impartial advice to ensure that the right strategy is being followed. 

We can obtain accurate, up to date advice on current values to assess realistic LTV positions as well as what exits could be achievable. 

Our current cases cover the breadth of the UK raging from individual buy to let houses to multi-let developments. In each case, obtaining all relevant information early and positioning the asset for sale or to achieve a refinance swiftly will obtain the best outcome. 

If you are experiencing any issues in this sector and would benefit from further advice, please get in touch with one of the team for an informal confidential discussion. 

The retail and food & beverage sectors, in high streets and shopping centres, have faced significant challenges in recent years, and we believe there are solutions that need to be considered. Aside from a commercial business rates structure that has long been out of step with market changes, the structural changes from traditional bricks & mortar to online retailing that the sector had been experiencing was accelerated exponentially by the Covid-19 lockdowns.  Furthermore, just as the industry is starting to recover, rising energy costs and the cost-of-living crisis is now starting to temper consumer demand, as well as the ability of F&B retailers ability to remain open for trade. The talk of operators charging £10 for a pint of beer, with £100 steaks just to maintain profits, is striking. 

Key issues  

• Supply chain costs have increased as a knock-on effect from Brexit and rising energy costs, squeezing profit margins and necessitating price increases. This has also dramatically affected the cost of fitting out new sites. However, this is unsustainable against a backdrop of weakening consumer demand.  
• Staff costs are increasing, not only with the confirmed rise to the national living wage, but with high employment rates creating competition from alternative growth sectors.  In particular in the F & B sector, there is a shortage of trained staff and we are aware of restaurants being unable to operate and so remaining closed because of this. 
• Energy costs are a direct outgoing impacting across the sector, with no cap in place for commercial properties and the Government’s price guarantee only covering a 6 month period. A number of operators are closing at quiet times of the week to save on operating costs. What will happen when the cap is removed in March, a time of year when the hospitality industry in particular has poor cashflow? 
• MEES regulations are set to tighten and many properties, especially older high street stock, are poorly positioned to achieve compliance without extensive and costly improvement works. If a property is not MEES compliant then it will be unlawful to let it and could be regarded as unsuitable for a mortgage advance. 
• Rising interest rates and the cost of debt finance is a common issue across all sectors but which creates particular challenges for a sector that has long been out of favour with many lenders and has only recently seen a return of debt to the market. Landlords requiring new finance are finding this is far harder to secure and considerably more expensive, adding to the pressures on net returns. 
• An increasing over supply of retail space has been a common theme along the high streets of most town centres. The direction of travel looks set to continue, with many retail centres still shrinking whilst alternative uses are awaited, albeit some retailers are recognising the “bricks & clicks” linkage between online and physical retailing. The expectation is that there may be further CVAs in the sector and increasing Administrations. 
• Consumer demand is anticipated to continue to weaken as people reprioritise expenditure to cope with rising inflation. It is expected that discretionary spend will be the first to be reduced, impacting mid-market food & beverage retailers hardest, albeit more experiential or luxury spend may be more resilient. 
• Tenants are still struggling with the impact of lockdowns, and now with the first ‘normal’ Christmas trading period, are hamstrung by a series of strikes estimated to cost the hospitality industry alone c.£1.5bn with cancellation rates of up to 40% (Guardian/BBC). Against this poor trading environment, Landlords are offering increasingly generous terms to retain tenants and avoid the rising costs of holding a vacant property, particularly the cost of empty business rates where assets are not under the protection of receivership. 

What to do about this now 

• The best properties will navigate this storm better than others. In order to do so a clear strategy is needed. Is there likely to be demand from other occupiers?  Can the property be repurposed for another more attractive and lucrative use? What planning options are there? Can new operators offering competitive socialising, or experience-led retail models increase footfall and/or diversify the income into food and beverage. 
• Lenders should ensure there is good visibility of service charge and rental income. Are service charge budgets and income being managed sensibly? Is the income being reinvested in the asset or spent elsewhere? What budgeting is in place to ensure the property is maintained and doesn’t deteriorate? 
• Can energy consumption be reduced, moreover, can energy be generated on site? Is there room for photovoltaic panels and is the payback period now acceptable? 
• Future proofing for environmental requirements under MEES will come further into focus as we near 2025. What are the EPC ratings of properties and what plans are in place to upgrade those units not meeting these standards? Can a tenant fit out assist in improving these ratings with no cost to the Landlord? 
• Proactively review tenant covenants alongside lease events and target these early to help enhance security of income. 
• Consider incentives to attract and retain tenants where necessary and avoid empty holding costs. A rent-free period or reduced/stepped rent to secure occupation is likely to be preferred to a longer void period. Many Landlords are amenable to converting some of the incentive to capital (dependent on covenant strength). 
• In situations where enforcement is a consideration for lenders, then thought can be given to a pre-enforcement monitoring role, allowing an experienced professional to engage on the lender’s behalf with the borrower and review operations, advise on business plans and give informed pricing advice where appropriate. 
• If monitoring is not possible, or the borrower not co-operative, then an appointment of a Fixed Charge Receiver can improve the net operating income. Fixed Charge Receivers are not liable to pay business rates, so offer an immediate cost saving when appointed over a vacant property. 
• Consider alternative uses if the property is moving further away from the prime retail pitch. Is there a credible option for redevelopment that can help drive an enhanced capital receipt, possibly in conjunction with neighbouring owners faced with the same challenges? 
• What’s the exit strategy?  Obtain a current property value to understand any challenges around refinancing and the profile of prospective purchasers. Would a sale prior to a break option or lease expiry be preferable now, mitigating the loss through value erosion closer to these events? 

How can Cushman & Wakefield help 

Our Receivership & Recovery Solutions team regularly provides strategic advice to lenders, insolvency practitioners, corporate and equity fund clients on challenged properties. We are experienced in dealing with distressed retail assets and devising strategies to assist lenders to reach the best outcome and maximise recovery. The key is understanding the risks involved with dealing with often complex retail assets and our knowledge in the sector has been obtained from dealing with a number of shopping centre sites over the last 10 years. 

Solutions we can offer include providing third party impartial advice to ensure that the right strategy is being followed. 

We can obtain accurate, up-to-date views on pricing, utilising our expert valuers and specialist capital markets teams. 

Our experience in dealing with assets of this type can provide opportunities to discuss with alternative lenders to provide a wider range of solutions to challenged situations. 

We are able to share sector specific insight, utilising our specialist teams who can provide the expert knowledge on particular areas of concern. 

If you are experiencing any issues in this sector and would benefit from further advice, please get in touch for an informal and confidential discussion.