The retail sector has been the hardest hit by the impact of coronavirus, according to the Knight Frank Property Market report for the first half of the year 2020.
The negative impact is largely attributed to the government measures to slow the spread of the disease, which included a 2-month lockdown that saw many commercial units closed and movement of people prohibited.
Knight Frank says the period under review has seen a contradiction in trading patterns and consumer spending in the Knight Frank managed malls in Uganda.
Quarter One of 2020 showed significant turnover growth across all sectors, significantly higher than GDP growth and inflation. Retail in general was buoyant and the sector was anticipating a great year ahead.
However, with manufacturing closed and supply chains affected due to Covid-19, retailers struggled to get product on shelves, and in early March, stock gaps started to impact on sales.
“The back end of March conversely saw sales increase significantly due to panic buying and stock piling by consumers foreseeing the impending lockdowns,” the report indicates.
Knight Frank attributes the significant increase in March sales to panic buying and stockpiling of essential goods prior to the lockdown. The reduction in sales for April (during the total lockdown and curfew) for essential services is attributed to the restriction on all forms of transport, making it very difficult for consumers to get to the malls, and also reflects the state of the economy with consumer incomes under pressure due to furlough, reduced salaries and redundancies leading to reduced spending.
In its previous report, Knight Frank had confirmed entry of Turkish based international fashion chain LC WAIKIKI into the Ugandan Market with a 2000m² store at Acacia Mall (the largest LC WAIKIKI store in Africa). The store was due to open in July but this has been pushed back to later in the year to Covid.
“Both retailers and retail landlords have seen the lockdown measures heavily impact their businesses negatively, and the outlook for the rest of the year is bleak and uncertain”.
“During the lockdown period, rental payments have not been forthcoming for obvious reasons, and Force Majeure clauses are being invoked for those who have them in their tenancy agreement”.
Force Majeure is not a common law right, and where it is not present in a tenancy agreement, the parties need to discuss a way forward regarding commercial terms, as the rent is payable from a contractual perspective.
Knight Frank says most landlords have undertaken to give stimulus solutions to their tenants on a case by case basis, so as to allow deferred rentals for up to 6 months. The main purpose being to achieve an optimum outcome which balances the consequences of the lockdown on both parties, against the symbiotic and mutual relationship needed for retail business to succeed.
Retail rental rates remained stable in the first quarter of 2020, but such will probably contract by approximately 30% post lockdown, depending on the ability of the general economy to bounce back, and consumer spending to return to pre-Covid 19 levels.
Regarding office space, Knight Frank is projecting a worst-case scenario of approximately 10% – 20% reductions on net annual rent collections for prime office properties this year.
The report states that though there has been no downward pressure on prime office rents yet, liquidity pressure on tenants has in turn led them to request for lease concessions with particular reference to rent payment or abatement of their contractual obligations.
In response to this, landlords are considering factors such as price point in the market, covenant strength, tenant-renewal and default probability, local regulations, building appearance due to vacant spaces, and potential reputational risks in arriving at the decision for individual tenants’ requests.
Similarly, landlords are reluctant to reduce headline rents, but are offering short term remedies by way of rental discounts and or deferred payments.
The start of 2020 seemed promising with regards to increased inquiries and interest in office space for rent on the back of a tight demand side that had been experienced by the market in this sector throughout 2019. Most of these inquiries were from local and multi-national corporate organisations headquartered in countries which were affected by the pandemic earlier than most.
As a result, many of these inquiries have been put on hold as countries emerge from lock down.
The industrial sector has equally suffered disruption due to Covid with supply chain affected which has further suppressed demand and steadily falling rents over the past few years.
“When China closed for business at the beginning of the year in their fight to contain the pandemic, imports into the country stopped, affecting traders wholesale and retail business which is the biggest source of demand for storage space,” the report states.
The entire logistics and supply chains were affected and are yet to recover as trucks from neighboring East African countries pile up at the border awaiting testing and tracking process before being allowed to proceed.
Some big manufacturing companies have closed their facilities and others have laid off staff as a result of reduced demand for their goods during lockdown; while others closed in a bid to stop the spread of the virus.
The manufacturing sector of Uganda, will be severely impacted during the pandemic, because their activities must be performed on site and cannot be done remotely.
Reduced disposable income as a result of poor economic activity has reduced demand for manufactured goods and services. We envisage this status quo continuing for the rest of the year. This will certainly have an impact on rents and capital values in the mid – long term.
Looking at the residential sector which already suffered from weak demand, it was difficult to launch new projects and/or complete the ongoing ones due to construction halts and labour shortages.
According to Knight Frank, the transactions which were in the process of being concluded were put on hold, but are slowly being revived by interested parties. The mass exodus of over 1,000 foreign nationals back to their countries at the announcement of lockdown in Uganda left the fate of many tenancies for private rented accommodation in limbo.
Tenants will be looking for rent concessions and or deferred rent payments to allow them the breathing space to reopen and revive their businesses after lockdown.