With the majority of European countries facing further isolation and social distancing measures for several more weeks, 2020 will certainly be a year to remember for a number of reasons associated with the first global pandemic for 100 years.

Being stuck at home certainly has its limitations for shoppers; consumer confidence is at a five-year low across Europe and although spending on non-discretionary goods including online shopping and entertainment has increased, the economic disruption for those businesses with a physical presence is untold.

Naturally, this has had a knock-on effect on most types of commercial real estate, with governments across the continent fast-tracking tenant-friendly legislation to support businesses from spiralling into administration. In many cases this has included rent reductions and protection from eviction designed to protect those most in danger of longer-term consequences, typically SMEs who might not have as robust a back-up strategy as larger companies.

Although these measures will save many a business from administration, what is the cost? Landlords are arguably the first to be hit by the consequences of current strategies which favour occupiers. Many, who have little to no protection, are receiving a fragment of their usual rental income with the retail and hospitality sectors seemingly the worst hit with percentages of rental income below 20 per cent in March.

Many of these landlords will also have financial obligations to banks and lenders in the form of interest payments on loans. This is noticeably a very different time to the global financial crisis in 2008, when real estate industry was involved in a much more major way. Since then, more strict regulations in place mean that loan-to-value ratios do not exceed more than 65 per cent. Banks are also more likely to have strong capital levels which, alongside adequate liquidity, mean that they are far better prepared to survive the economic downturn.

In order to keep the process running as smoothly as possible, banks are focusing on assisting existing borrowers (as opposed to writing new debt). That said, their exposure to real estate remains significant: more than €1 trillion ($1.55 trillion) of debt is secured against commercial real estate in Germany, France and the UK alone, according to Cass Business School.

As a result, in the current difficult circumstances landlords are having to focus more than ever on their operations; on tenant retention and the protection of SMEs to ensure that the ‘return to normality’ will involve minimal losses with viable partners in place to drive the recovery of cash flows. Clear communication on the behalf of landlords is key to retaining a sense of trust with tenants and ensuring a smooth and safe return to the asset in question.

In order for landlords to be considered reasonably during this time, governments and central banks across Europe must ensure that whatever rules are relaxed for banks during this period are passed onto landlords in order to protect their relationships with tenants.

Despite the fact that this is never a ‘one size fits all’ solution, flexibility and understanding will help all parties weather the pandemic with as few losses as possible to ensure a steady return to normality and eventually a full recovery.

Further information

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