The retail sector has been one of the hardest hit by the Covid-19 pandemic due to lockdown restrictions and a rapid acceleration of the trend towards increased online retailing. To mitigate the impact on tenants, some jurisdictions introduced moratoriums on eviction for non-payment of rent, which has resulted in some tenants owing significant arrears of rent and the respective landlords also suffering the negative cash flow consequences. All of these factors have put pressure on retail asset values.
It was interesting to hear the views of the leading investors, that while the sector remains under pressure, in APAC the sector has been somewhat insulated vis-à-vis the rest of the world due in some part to the comparatively newer retail shopping centres which were already skewed towards a tenant mix that included experiential retail and high-end F&B. It was clear from the discussion, a recognition that moving forward there is a need for the sector to adopt and create immersive and shareable experiences (experiential retail), while maintaining an element of convenience retail. Arguably, APAC countries have also been ahead in terms of the shift to e-commerce, which was well underway pre-pandemic, due to its younger and upwardly mobile demographic which makes up a significant portion of these populations. Some regional differences were noted, in that the repositioning of large retail assets, such as traditional malls, would likely be seen more in Australia than in some of the other Asia-Pacific cities where they had newer built product. Tenant mix will continue to evolve, potentially incorporating last mile distribution and offices into some of the existing retail space, but this will be very much asset-specific.
It is not just the tenant mix and retail experience which will adapt and change, but also this crisis has had landlords and tenants taking a closer look at the terms of their leases and perhaps taking a different approach to what has traditionally been the status quo. The concept of risk sharing between landlords and tenants has taken centre stage, which can be demonstrated by a move in some sub-sectors to a minimum base and turnover rent contribution. Generally speaking, most standard retail leases do not cover force majeure events, including a pandemic. There may also be a shift as to how leases are structured going forward, with rent suspension clauses in regard to force majeure events, break rights, adjustments to insurance and common area costs in certain circumstances. We will need to see how this evolves over the medium term.
From the landlord perspective, investors are having to take a deeper look into risks associated with their tenant base. In the current situation, landlords have had to make hard decisions around which tenants to support and offer concessions. In some instances, large global landlords have actually invested in the business of the tenants to support what they consider to be a robust business, but for the short term impact of the pandemic.