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What does inflation mean for retail & leisure rent reviews?

Blog What does inflation mean for retail and leisure rent reviews hero

The last few months have seen unprecedented increases in inflation.


Historically, open market rents on retail & leisure property have been an effective hedge against inflation, while on the other hand, most index-linked rent reviews are capped at levels that are well below current inflation levels. This begs the question as to whether such properties are more valuable with open market or inflation-linked rent reviews.

Last year we launched an online tool to help calculate the effect of movements in the Consumer Price Index (CPI) and Retail Price Index (RPI) on rent reviews which are geared to these indices. Not surprisingly, traffic to the webpage has increased substantially in recent weeks as inflation has climbed and future projections about the level it might reach have become steadily bleaker.

The graph below shows how the usual caps on RPI/CPI-linked rent reviews will limit index linked rents to well below current/forecast inflation levels for some considerable time:

So will open market rents fare any better?

Inflation can be driven by a number of factors. In the mid-1980s, for example, the economy boomed during the ‘Yuppie Years’ of rising wages, rising house prices and a stock market boom. Inflation was driven by demand side factors and retail & leisure rents increased accordingly.

The current economic picture is very different. The retail & leisure industry has suffered two distinct ‘shocks’. The pandemic lockdowns caused ‘demand shock’ where (with the exception of essential retailers) all shops, bars and restaurants were forced to close. Now working and shopping patterns are finding a new normal, but in the vast majority of cases, rents have rebased at levels well below their pre-pandemic levels. Just as this has been settling down, the economy is now facing ‘supply shock’, as a result of the huge increases in energy prices. These have come on top of challenges the businesses were already facing in terms of increasing costs and the limited availability of labour and materials following COVID-19 and Brexit.

Rental value is a factor of profitability. The effects on market rental levels will vary between locations and sectors, but it is fair to say that the vast majority of retail / leisure businesses will be severely affected by these significant increases in supply costs, hand in hand with reductions in their customers’ disposable income. On this basis, in the absence of major government intervention on energy costs, in many locations it is hard to see open market rents increasing in the near future - even from their re-based, post-COVID levels.

With this in mind, whilst the caps on index linked rent reviews will restrict rent increases to well below inflation, properties let on this basis are likely to remain the favoured option of many property investors for some time to come.

And it’s clear from the growing traffic heading to our RPI/CPI calculator that this is an increasingly important factor in investors’ decision making processes.

This article first appeared in React News in October 2022.

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About the author

Matthew Hobbs is Head of Retail - Lease Advisory and has worked in the sector for over 30 years. Matthew is a specialist in high value retail and leisure rent reviews, lease renewals and lease negotiations.


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Matthew Hobbs

Head of Retail - Lease Advisory

Retail - Lease Advisory

London - West End

Having worked in the Lease Advisory side for over 30 years, Matthew is a specialist in high value retail / leisure rent reviews, lease renewals and lease negotiations.

This includes luxury shops, bars, restaurants and gyms in London along with other large retail stores (particularly supermarkets / department stores) and flagship shops throughout the UK for both landlords and tenants. Occupational advice and due diligence on supermarket investment acquisitions is a particular expertise and he is regularly approached by investors and brokers alike to provide specialist advice in this area. 

His team of five full time professional surveyors and two consultants deal with retail / leisure rent reviews, lease renewals and regears for landlords and occupiers in all of the major towns and cities in the UK. He also works closely with the agency and investment teams in asset management initiatives, lease restructuring and investment acquisitions and sales.

He is on the RICS panel of independent experts and is regularly called upon to act as third party on high value rent reviews in Central London and throughout the country.

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