Published in The Sydney Morning Herald, April 9 2020
The federal government’s $194 billion economic response to the coronavirus crisis has rightly focused on helping businesses and affected workers to “hibernate” through the shutdown. But Tuesday’s announcement on commercial leases means that many retailers, cafes, pubs, gyms, and hairdressers won’t wake up on the other side.
The government’s reluctance to step on the toes of landlords and to inject more public money will ultimately slow Australia’s economic recovery.
Millions of “social consumption” businesses that have borne the brunt of the health response to COVID-19 are hanging on by their toes. Australian Bureau of Statistics business survey data released on Tuesday shows that more than 90 per cent of business in accommodation and food services and more than 60 per cent in retail have suffered a hit to demand. And in this cashflow winter, rent is the biggest barrier to survival.
The government’s wage subsidy scheme allows business to continue to provide an income for workers during the shutdown. Other costs such as stock can be stopped quite quickly. But unavoidable costs – of which rent is the largest – can’t be turned off. The average retailer pays almost $12,000 in rent a month; the average gym, $10,000. Cafes and hairdressers are losing $3000 to $4000 each month in rent.
For most exposed businesses, rent is less than 20 per cent of their operating costs under normal conditions. But while they hibernate through coronavirus, that will reach between 80 and 95 per cent.
The government had rightly recognised that rent was the missing piece of its “hibernation package”. Many commercial landlords have already voluntarily come to the table – the ABS reports that 38 per cent of businesses still trading have renegotiated their rent arrangements. But other landlords have been reluctant to reduce or waive rents, despite the fact that the market rent for most shopfronts right now is probably close to zero.
The new rental code sets out mandatory principles for landlords and tenants to negotiate an adjusted lease. It requires landlords to negotiate rent waivers and deferrals proportionate to the reduction in turnover for eligible businesses. The mandatory code will be overseen by a binding mediation process in each state and territory for the duration of the JobKeeper program (currently six months).
But the code ultimately falls short on scale, scope, and speed. The first big limitation is that relief is negotiated as a combination of waivers and deferrals. Up to half the relief can be via rent deferral. So, if a business’s turnover falls by 50 per cent, only 25 per cent of rent needs to be waived – the other 25 per cent can be deferred, with a minimum 24-month payback period.
Deferrals can help ease the short-term cashflow crunch. But most retail and food service businesses run on low margins, so many will not be able to absorb the deferred cost of the rent while trying to rebuild their business.
Another big hole in the package is the exclusion of tenants with a turnover higher than $50 million. The major commercial landlords reportedly lobbied hard for the turnover cap, which will exclude most of the national and international retail chains that fill many of the storefronts in our big shopping centres. While these chains may hold bigger buffers than “mum and dad” retail businesses, they do not have unlimited capacity to absorb losses.
Finally, it’s doubtful that this package can deliver relief fast enough for businesses with resistant landlords. A mediation process for potentially hundreds of thousands of businesses will take time. The six-month moratorium on evictions and a ban on drawing on loan-securities (including bank and personal guarantees) helps remove the sword over the tenant’s head while the binding mediation process is in train. But for many tenants, an extended period of uncertainty around outgoings will take its toll, particularly when layered on the huge number of other unknowns about the shutdown.
The government’s economic response to the coronavirus has generally been on the money. But this half-baked rent package is a significant misstep. Businesses can successfully hibernate only if they have enough fat to get through.
Rent waivers proportionate to lost revenue are needed for all businesses that meet the JobKeeper thresholds. To defray the short-term cost on landlords, state governments should compensate for a proportion – at least 50 per cent – of the lost rent. Governments could recover some of these costs over time as the economy picks up, through higher land tax on all commercial landlords.
Beefing up the package this way would provide a better sharing of the cost and, most importantly, avoid the economic pain we will all feel when far too many businesses fail to wake.