Real Estate in a Covid-19 Environment

The real dangers for property groups are yet to come as they suffer from the “consequential” impacts of the Covid-19 pandemic on tenants. Here we look at sector specific measures for Real Estate Groups and how these can protect your assets.

Real Estate Challenges

It has now been a number of weeks since the country was first “locked down”. With retail, leisure and hospitality businesses under significant pressure and other sectors facing various challenges from the crisis, the real dangers for property groups are yet to come as they suffer from the “consequential” impacts on tenants. Groups are already forward planning, with some offering “rent holidays” pro-actively, and many looking at their cost bases.

Leveraged Real Estate groups could face breaching covenants and become distressed themselves. Construction groups and developers will come under pressure as social distancing and/or self-isolation stop their employees or contractors from being able to continue building activities.

While there were not many sector specific measures for Real Estate groups, we have summarised some of the measures that are likely to be of relevance to businesses operating within the Real Estate sector and/or those with property assets.

Safeguarding cashflow

As with all businesses, cashflow is the most important consideration to be able to continue operating in the Real Estate Sector.

In light of economic pressures facing both businesses and individuals, the UK Government has introduced an assistance package with financial measures designed to alleviate cashflow strains on UK business.

Coronavirus Job Retention Scheme

We have a detailed CJRS FAQ page which is updated daily in line with Government advice.  We can also support you via a workshop to help with CJRS grant claim calculations.

A successful application under the scheme will provide you with a grant from HMRC of 80% of any relevant employee's salary, up to a value of £2,500 per employee per month, together with the associated employer National Insurance Contributions and statutory minimum pension contributions as required under auto-enrolment regulations.

IR35 – Deferral of rules for off-payroll working

On a payroll-related side-note, the UK Government has announced it is postponing the reforms to the off-payroll working rules (IR35) from April 2020 to 6 April 2021. This is a deferral of the introduction of the reforms, not a cancellation. The deferral forms part of the wider Government response to helping UK business navigate the choppy seas of the Covid-19 pandemic.

VAT and Income Tax payments

VAT payments due during the period 20 March until end of June 2020 can be deferred until 31 March 2021. Entitlement is automatic, however, businesses that normally pay by direct debit should cancel these direct debits if they wish to benefit.

Other VAT measures that can be taken to improve cashflow include delaying tax points by issuing time to pay requests instead of invoices, converting to monthly VAT periods (if in a consistent repayment position),  claiming relief for VAT on bad debts over six months old, accrued input tax recovery and/or reviewing advance payments made on account to HMRC.

Coronavirus Business Interruption Loan Scheme

The temporary Coronavirus Business Interruption Loan Scheme supports SMEs with turnover not exceeding £45 million per annum. It provides access to loans, overdrafts, invoice finance and asset finance of up to £5 million and for up to six years.

The Government will also make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees, so smaller businesses will benefit from no upfront costs and lower initial repayments.

The Government will provide lenders with a guarantee of 80% on each loan (subject to pre-lender cap on claims).

While unlikely to benefit large Real Estate groups, this may be of benefit to tenants who themselves qualify for the rules and should be communicated to them if they find themselves in financial difficulty (and even better would be to pro-actively highlight it to avoid non-payments of rent in the first place).

Support for larger firms

Under the new Covid-19 Corporate Financing Facility, the Bank of England will buy short-term debt from larger companies. This will support companies that are affected by a short-term funding squeeze, and allow them to finance their short-term liabilities.

The Bank of England have also committed to supporting corporate finance markets overall and ease the supply of credit to all firms.

Business rates holiday & cash grants

Hotels and similar establishments such as guest inns and self-catering accommodation may be entitled to:

  • a 12-month business rates holiday for 2020/21;
  • small business grant funding of £10,000 if in receipt of small business rate relief or rural rate relief; and
  • grant funding of £25,000 on a ‘per property’ basis for properties with a rateable value between £15,000 and £51,000.

Time to Pay service

All businesses in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service.

These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities.

Tax compliance measures

In addition to using Time To Pay mentioned above, there may be a range of actions corporate businesses can take to minimise tax cashflows or even obtain cash from tax measures. Businesses that pay corporation tax by quarterly instalments should be reviewing their estimates for liability to assess whether instalment payments should be reduced, or whether it is appropriate to apply for a refund. The Government has also reduced the interest charge on late paid quarterly instalment payments of corporation tax to 1.25% from 23 March 2020.

  • For groups / companies within the Quarterly Instalment Payments (QIPs) / accelerated QIPs regime, it is possible to make a claim to request for ‘excess’ payments on account towards the corporation tax liability (“CT liability”) to be repaid by HMRC. This applies where a company has made payments on account towards its CT liability under either regime; and
  • the company subsequently has grounds for believing that, by reason of a change in circumstances since it made the payment(s), its total CT liability for the period is likely to be less than previously calculated; and
  • the aggregate CT paid to date exceeds the revised estimated position as of the same date

If losses are expected from a business, it may be worth considering shortening the accounting period so a loss carry back claim can be made sooner to accelerate any tax repayment. However, care is needed to ensure other corporate compliance and financial reporting considerations are taken into account.

Other Property-related matters

Help from landlords

The British Property Federation has issued a press release indicating that the commercial property industry is ready to play its part in the recovery from the disruption caused by Covid-19. Tenants should be discussing the payment terms of rental agreements with their landlords to try and reach a mutually beneficial way of managing cashflow in the short term. Landlords will no doubt expect tenants to have taken appropriate advantage of other property and business related Covid-19 assistance from the Government. Rate relief, loan finance and the job retention scheme measures may all require some form of application or claim.

Moratorium of lease forfeitures

The Government has announced a three-month moratorium on lease forfeiture for non-payment of rents and other charges arising under commercial leases (see legislation at NC30 here). This will no doubt impact landlords of distressed tenants.

REITs and interest cover ratios

HMRC has some flexibility within legislation to waive some of the REIT criteria (such as the interest cover ratio) or allow for PIDs (property income distributions) to be delayed for a period of time. They are not minded to offer these concessions across the board at this point, so REITs are encouraged to get in contact with HMRC if this is something that you are considering or know they will need, in the coming months.

Student accommodation providers and waivers of student rent

Some student accommodation providers are waiving rent for the remainder of tenancies, as students go home or have become unable to work. This will have significant impacts for leveraged student accommodation properties as income falls and the consequential impact on cover ratios (however, see below).

Bank of England/PRA letters to lenders re covenants

The Prudential Regulatory Authority (PRA) has written to banks with guidance on how to support the economy through the Covid-19 crisis. Among other things, the PRA urges banks to treat covenant breaches arising from Covid-related stress differently from “borrower-specific” covenant breaches and to consider waiving them or not imposing “new charges or restrictions”. While this is not specific to real estate lending, the letter should provide some cover for lenders to take a supportive approach to landlords facing cashflow challenges.

Suspension of CITB industry training levy contributions

As part of a package of support measures during the coronavirus pandemic, the Construction Industry Training Board (CITB) has announced that it is to suspend Levy contributions for the next three months.

During this time of uncertainty, it is important that the Real Estate sector is aware of all the avenues that are available to them to ensure that any negative economic impact is mitigated.

Get in Touch

Please get in touch with your Mazars contact should you require further information or wish to discuss any of the above.

Contact us today