Eviction ‘holiday’ poses threat to schemes’ property investments

The moratorium on evictions — with rent still being owed, but no enforcement actions against non-payment being permitted — was first introduced in April and was supposed to end in September, but it has now been extended until the end of 2020. It is intended “to stop businesses going under and protect jobs over the coming months”, housing minister Robert Jenrick said.

Though welcomed by the likes of the British Retail Consortium as providing relief to struggling retail outlets and restaurants, the British Property Federation said the extension was “hugely disappointing” as it is open to exploitation by “well-capitalised” businesses who may refuse to pay rent, even where they could afford it, the BBC reported.

Commenting on the move, Eversheds Sutherland partner Bruce Dear told Pensions Expert that, although he was sympathetic with the government’s aims in extending the moratorium, he remained concerned that the weight of its assistance was falling disproportionately on the side of tenants while tying the hands of landlords.

The UK property industry is chiefly driven by the big pension funds, the big institutions. The landlords of these tenants, whether the tenants are Pizza Express, Pret or whomever, are you and me

Bruce Dear, Eversheds Sutherland

Pension schemes left powerless?

Contra the popular image of the landlord as property baron, Mr Dear said: “The UK property industry is chiefly driven by the big pension funds, the big institutions. The landlords of these tenants, whether the tenants are Pizza Express, Pret or whomever, are you and me.”

By restricting the ability of landlords to collect or to enforce collection of unpaid rent in such a way, quite apart from the ability of rich tenants to game the system, he explained that the moratorium “is really just hamstringing your savings, your pension fund, the granny down the road’s equity release mortgage”.

Because traditional thinking is that real estate returns more money than bonds, while being more stable than equities, it can be an attractive option for schemes looking to diversify.

Mr Dear estimates that pension schemes can invest up to 15 per cent of their portfolio in real estate, though the more common figure is between 6 per cent and 10 per cent. Schemes may act as direct landlords or they may invest in property equities, which have also taken a hit because of the Covid-19 lockdown.

One foreseeable knock-on effect is that pension schemes, which through their investments “fund a lot of new builds”, may be putting off making those investments in future “because they’ve had their fingers burnt so badly by this episode”, Mr Dear warned.

“I think the government just needs to bear in mind that the UK real estate industry is one of the very few jewels of the UK economy — and it is driven by rental income,” he said.

“Rental income is its lifeblood. And so if the government wants to protect tenants, that’s all well and good and it should do so.

"But I do believe it also ought to bring in rent support and rent protections from landlords, so that we don’t suffer what will otherwise be a gaping hole in the middle of the flows of income streams that power the UK economy.”

Some cause for optimism

Andy Leggett, associate at Barnett Waddingham, noted that, although roughly one in six or one in seven properties may have been affected in some way by the lockdown, the impact does not fall evenly across two of the main types of pension scheme relationships with commercial property: connected and unconnected.

Connected properties, which occur when the company buys the premises using the pension fund and then rents the property back to the business, pose greater threats of conflict of interest when it comes to making use of the moratorium, as it is harder to justify withholding rent without falling foul of tax law and incurring unauthorised payment charges.

Unconnected properties, however, where the property is rented to a business but it is not owned by or associated with the pension fund, have considerably more leeway. 

Mr Leggett said the positive sign is that landlords and tenants in these relationships are engaging with each other more often than not to discuss repayment plans, and other options are not always available when the property is connected.

In the case of connected properties, “there’s around a 50:50 split between those that are in a repayment plan and those that are still able to pay”, with those falling outside those two options only amounting to about one per cent, he continued.

The moratorium is not “giving businesses a freebie, it’s giving them a break”, he said.

Government: don’t panic

Responding to concerns about the impact of the moratorium on pension schemes, a Ministry of Housing, Communities and Local Government spokesperson said: “The measures we’ve announced will protect jobs in businesses facing uncertainty following the period of closure earlier in the year, but this is not a rent holiday and rent is still owed.

“Where tenants can afford to pay in full they should do so, and if they cannot pay in full now they should pay what they can.”

They continued that the extension “provides landlords and tenants with an opportunity to come together to reach agreements on any outstanding commercial rent that work for both parties, using the principles set out in the code of practice published earlier this year”.

Because the move does not represent a rent holiday or anything of the kind, any missed rent will still be owed, and landlords will have the right to claim forfeiture should it remain unpaid and without an agreed repayment plan once the moratorium expires.

“We recognise the current challenges facing commercial landlords and the significant impact recent changes are having on their business models. We will continue to work urgently with the sector to ensure it is adequately supported,” he spokesperson said.

They added that, although market fluctuations are not uncommon, pensions are long-term investments and savers should not be unduly concerned by short-term changes in the value of assets.