From the Exosphere
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From the Exosphere

Covid effect intensifies Capital rates debate

With Kevin Jenkins / 4 May 2020

This article was first published in Commercial Property New Zealand — Issue 300: 28 April 2020

The Covid-19 narrative has rightly been dominated by the need to keep people safe, the likelihood of a global recession, and the threat of sharply rising unemployment. One other dimension that’s starting to get more attention is the impact of the lockdown on individual businesses.

Outside the primary sector and some other essential services, most businesses are urgently looking to find and preserve cash wherever they can. Many have zero or only minimal revenue coming in during the lockdown. Most of my mates who own and/or run businesses track cash each day, are chasing debtors hard, and are sometimes entering into schemes of agreement. I know of a tourism firm being paid a $40,000 debt at $1000 per week.

The Government recently published the list of firms that have received financial assistance, and plainly this is growing fast. One estimate is that 60% of workers are now subsidised.

One place businesses are looking for savings is rent. I know of firms that have agreed rent holidays or 50% rent cuts. I know of other cases where landlords with pre-2012 leases are resisting any cuts.

At one level that’s the market working. Landlords are making difficult judgments, accounting for not just the particular lease terms but also goodwill based on long- term relationships as well as compassion and a sense of sharing the pain. They’re also making clinical business calculations — for example, there may be little point in enforcing rent payments if it only means the tenant’s business fails and the space becomes vacant.

There are about 5000 commercial properties in Wellington City, with about 4000 owners. Image source: Unsplash

The Property Council says it has been inundated with calls from both landlords and tenants who are finding it impossible to find a rent abatement middle-ground that will see both parties survive

The Prime Minister weighed in on this, urging landlords dealing with rent arrears to take a long view and to “just be a good human being”.

That same day the Government announced a new $3.2 billion business stimulus package, which includes allowing tenants more time to catch up on rent and landlords more time to make their mortgage payments.

The Wellington scenario

There are about 5000 commercial properties in Wellington City, with about 4000 owners. They include the big firms but also lots of small operations, like retailers, that own their own building.

The Covid-19 crisis has intensified the debate about rates between the capital’s commercial property owners and the City Council, which voted on 9 April to consult over a proposed rate increase.

Councils face a horrible dilemma. Most face a full programme of infrastructural and other expenditure, and now their revenue from rates, parking and other fees is taking a major hit.

Landlords are pointing out that the rent holidays and breaks they are agreeing to in the lockdown will threaten the viability of their own businesses.

They’re noting that tenants’ business revenue may take some time to recover — for example, revenue for hotels and hospitality businesses that rely on tourism may take up to two years to return to 2019 levels.

I’ve seen other reports saying tourism took eight years to fully recover from the GFC. Many of us also remember the vacant lots and idle cranes after the 1987 crash a generation earlier.

Some landlords are arguing that just as rent holidays may be justified if tenants lose the benefits of their lease, rates relief may be justified because commercial landlords lose the benefits of city services while their buildings remain empty.

One place businesses are looking for savings is rent. Kevin Jenkins says he knows of firms that have agreed rent holidays or rent cuts. Image source: MartinJenkins

Aside from the interests of individual landlords, some in Wellington are also arguing that in aggregate the current rates levels may contribute to a stall in investment in the city’s commercial property, just when the country needs a busy construction sector to keep people employed.

There may also be factors beyond the Covid-19 crisis. There is the talk of changed work patterns, such as people continuing to work from home beyond the lockdown — this could impact longer-term demand for office space, threatening the vibrancy of our inner cities and even creating the risk of stranded assets.

Higher costs

A key context for the rates debate is that according to Wellington’s commercial property owners, their costs are the highest in New Zealand. I understand the average cost of insurance is about 0.55% of the value of the building (about $33k for a $6m building). The next highest is Christchurch at 0.35% (about $21k); it is 0.06% (about $3.6k) in Auckland/Hamilton.

Wellington City Council reduced the commercial rates differential from 7.0 times residential in 1995 to 2.8 by 2019. However, owners are not happy that the council just pushed that back to 3.25 from 2020 (it’s 2.2 in Auckland and 2.6 in Christchurch).

There are other factors in play in Wellington, like the cost and complexity of meeting earthquake standards. But on the other hand, the property market in the capital is underpinned by the dominance of Government tenants.

One of the features of the response to the virus in New Zealand has been people working together to maintain jobs, businesses, and services.

It’s all about trade-offs though, and the choices facing our businesses and elected officials will only get harder.

About the author

Kevin Jenkins a Co-Founder of the professional services firm MartinJenkins together with Doug Martin in 1993.

Kevin has undertaken a wide range of assignments in the science and innovation, economic development, and tertiary education sectors — for example, work on the establishment of Callaghan Innovation (New Zealand’s advanced technology institute). He has worked a lot in the justice sector, including leading a major programme targeted at leveling off the increase in the prison muster, and another at ensuring that the cost of the sector is stabilised.

MartinJenkins Founder Kevin Jenkins

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