The Difficulty in Determining a Current Market Rental within the Covid-19 Environment, with Caution to be Considered by all Parties to the Lease
Without doubt, the task of the determination of the current market rental value of a property by most real estate professionals is perhaps one of the most daunting for many within this current pandemic.
The task of a Specialist Retail Valuer and/or Certified Practising Valuer is not like any other time in the writer’s working career, of which spans over a thirty year period.
The roadmap of the determination of rental is clearly defined under the Retail Leases Act (RLA) 2003, Section 37, with the more pertinent points to consider as follows:
“The current market rental is taken to be the rent obtainable at the time of the review in a free and open market between a willing landlord and willing tenant in an arm’s length transaction having regard to these matters:
- The provisions of the lease,
- The rent that would reasonably be expected to be paid for the premises if they were unoccupied and offered for lease for the same or substantially similar use to which the premises may be put under the lease,
- The landlord’s outgoings to the extent to which the tenant is liable to contribute to those outgoings,
- Rent concessions and other benefits offered to prospective tenants of unoccupied retail premises,
- But the current market rental is not to take into account the value of goodwill created by the tenant’s occupation or the value of the tenant’s fixtures and fittings”.
Sounds like a relatively straight forward process, however, with regard to the current real estate market there are a number of fundamental road blocks of which obviously make the determination process difficult, with many contentious issues and hurdles to be overcome, and even if they are properly analysed and assessed, is the rental sum assessed by the determining valuer representing what a prudent commercial lessee would pay in the current pandemic and at a time that the commercial real estate market has never seen before?
To take the simplistic of views, Victoria has effectively been in lock down since March 2020, with current status as at August 2020, being that Victoria is in a “State of Disaster”.
The following provides a broad brush view perhaps of some of the more defining areas of consideration in making this statement:
- The lack of commercial real estate transactions from March 2020 until today. Few transactions of a rental nature avail throughout the Central Business District of Melbourne and Metropolitan suburbs of Melbourne. Moreso, throughout all submarkets of commercial real estate,
- Historic or existing rental evidence does not provide a guide as to the “as at date of valuation“ within the property cycle of the current pandemic, further not allowing a “like with like” comparison other than perhaps the size of the improvement and locality,
- “Rent relief” period current and future, effectively will and has created a minefield, with future repayments moving forward difficult to obtain, also varying depending on the locality of the property, market segment, business profile and permitted use,
- The rental levels considered by a valuer in the market place in any market let alone pandemic, taking into account “face” or “effective“ rental levels, with incentives in some instances for neighbourhood retail strip centres considered up to say 40-50% in the current market, inclusive of fitout, rent free and deferment bundle with a large number of retail leasing agents stating “whatever is on the table will be considered”,
- Even if the valuer determines a rental in light of the commercial viability of a rental level within Covid-19, the question still begs, regardless of all facets of a professional valuation assessment and hence, determination of a rental under the RLA guidelines, what is in fact the rental sum that a willing lessee would in fact pay in the current pandemic?
- The major shift to online shopping via the internet in the last six months has been enormous, with a more defined shift away from bricks and mortar in its current capacity. With few business profiles wanting and or needing space in most instances as per their business model of twelve months prior. In short, downsizing is to become the new “norm” under current and post pandemic conditions.
The inconsistency of a “true” level of value within the last six months virtually allowing individual parties under the Federal Leasing Commercial Principles the ability for rental reduction in line with current variances in their individual business and hence, turnover being the driving factor.
The writer is a Fellow of the Australian Property Institute, a Licensed Real Estate Agent and Specialist Retail Valuer, having been on the panels of Small Business Commission, Australian Property Institute and Real Estate Institute of Victoria for over fifteen years.
If any matter arises in relation to the assistance of lease negotiations and/or rental valuations for determination purposes, please directly message Mark Ruttner on 0411 419 674 or firstname.lastname@example.org, email@example.com 03 9690 1112
First Valuation Group
Ground Level, 18-22 Thomson Street
South Melbourne, Vic 3205
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