The economic effects of Covid-19 on retail and hospitality sectors likely to extend long after virus is defeated
The impact of the Covid-19 pandemic on the retail and hospitality property sectors will be felt long after the virus has died out.
Social distancing and the new restrictions on restaurants, bars and clubs will impact these businesses’ returns in the short term while, in the long term, remote trends developed during this period could become entrenched.
In addition, these businesses will take time to claw themselves out of the financial hole dug during the virus pandemic.
In the very short term, panic buying of groceries is a “mini windfall” for food and grocery retailers as the stockpiling is completed but FNB commercial property economist John Loos expects a rise in the household savings rate and a cutback in borrowing as “fearful households become more conservative spenders”.
“That too could be a key negative for retail property.”
He says the new restrictions on restaurants, bars and clubs is a potentially “massive blow” for tenants of many retail properties, and will be felt in the property returns.
“I think we’re heading into a period of significant increases in capitalisation rates and capital value declines in nominal terms, as rental income streams for retail properties come under intense pressure. “It isn’t just about businesses on which restrictions get placed; it is also about virus-induced fear.”
Many retail and hospitality businesses are closing their doors in the face of restrictions, says Jeremy Clayton, director of the President Hotel and managing director of Turnkey Hospitality. He is also a Fedhasa Cape board member.
“The regulations seem to becoming more onerous and it makes little sense to try to stay open… Also by staying open there is risk of spreading Covid-19 and hence the principled approach is to close.”
While this has a “massive impact” on staff and owners, recent regulations allow owners to use the UIF as a payment top-up mechanism to protect the most vulnerable.
Even after the pandemic, recovery will take at least four months. “As a hotel, we are hoping to scale operations back up in September and hoping for a good 2020/21 season.
The hospitality sector needs to ensure there are cash reserves to firstly survive and, secondly, re-launch when the world normalises.” Clayton says he is working on a “silver lining” which links the call centre industry to the hospitality industry to save jobs and hotels.
“Call centre business has boomed and we are trying to shift thousands of laid-off hospitality staff into the call centre space in next to no time. Call centres would use hotels as base. It’s a fantastic opportunity.”
But Loos says retail and hospitality businesses are not the only ones being negatively impacted. If the virus lasts for much of this year, and restrictions are in place across the globe for this time, a “significant recession” will probably affect all major property classes, including office, industrial and residential.
“Office and retail space demand could change markedly over the longer term following this crisis, because a key coronavirus impact has been to fasttrack the use of technology for remote working by corporate staff – and I suspect for online shopping too. Once these habits are entrenched, people won’t easily return in full to pre-crisis habits.”
This means that there will be less need for retail and office space in the future. “This was on its way already but the virus may have sped the process up.”
Everything, he says, depends on how long the global restrictions remain in place. “Much also depends on how effective economic ‘rescue’ packages will be. If a myriad of bill and debt payment ‘holidays’ can keep businesses alive through this period, the recovery thereafter may be reasonably swift. But I’m not yet clear on South Africa’s future plans in this regard…
“I think a significant correction during the virus period will be the order of the day even with significant economic rescue packages.” The impact of the pandemic so far has been “devastating” for smaller businesses which rely on month-to-month trade for their cash flow, says Frank Reardon, chief executive at the Fundamentum Property Group.
How quickly they are able to recover post-pandemic will depend on the kind of support they get from the government. “Sadly, as a developing economy with low savings, we are unlikely to see the extensive support initiatives introduced in the rest of the world to support small business.”
Retail sector, apart from grocers, suffering
Only a few sectors have benefited from the global lockdowns associated with the pandemic, including supermarkets and pharmacies.
There has also been a “huge impact” on entertainment establishments, particularly restaurants, clubs, cinemas and coffee and liquor-related retailers.
“Contact-based retailers, such as hairdressers and spas, have also been negatively affected. Shopping centres with a large entertainment focus have probably been hardest hit, with centres focused on essentials, such as groceries, faring better,” Reardon says.