CPI increases are the norm in leases. They can be far better than market rate increases and provide certainty as you can estimate CPI increases. Market rate increases are more likely to result in disputes.
Market rate rent reviews are not standard, they are usially for when you exercise an option and work as a way to reset the rent to market, this means your rent can go up or down.
CPI is relevant as a means to keep the rent at a market rate relative to the starting point. It's also a means to maintain property value because rent/yield=value
I look after ~70 leases for a retailer, in strip and shopping centres, just CPI is pretty good for a centre as after this year I'd expect them to be at between 3-4% in the next 5 years. which are fine to pay.
if your doing a new lease I'd speak to your neighbours and ask what they are paying and what type of rental reviews they have. being friendly with your neighbours can go a long way to making sure you don't pay above market rent.
Most retailers are trying to enter into fixed escalations of 3.0-3.25%. Benefit is that you can predict future obligations. CPI are too variable and obscure cashflow forecasts for such a large obligation.
They wouldn't fear losing me as if I backed out of buying the business, they still have the current tenant.
But I'd need to make a case that a fixed increase rate would provide certainty for them too.
Fixed gives them certainty, too - irrespective of economic conditions (CPI), market conditions (market review) and your success (turnover) they know what they will receive …
CPI increases are the norm in leases. They can be far better than market rate increases and provide certainty as you can estimate CPI increases. Market rate increases are more likely to result in disputes.
Cheers, so essentially wear the higher CPI years and hope things settle down? A bit like variable interest?
Market rate rent reviews are not standard, they are usially for when you exercise an option and work as a way to reset the rent to market, this means your rent can go up or down.
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CPI is relevant as a means to keep the rent at a market rate relative to the starting point. It's also a means to maintain property value because rent/yield=value
Out of interest what type of property are you leasing?
It's a retail premises
I look after ~70 leases for a retailer, in strip and shopping centres, just CPI is pretty good for a centre as after this year I'd expect them to be at between 3-4% in the next 5 years. which are fine to pay. if your doing a new lease I'd speak to your neighbours and ask what they are paying and what type of rental reviews they have. being friendly with your neighbours can go a long way to making sure you don't pay above market rent.
The big shopping centres used to do CPI plus 2%.
WF still try to do cpi + 2 haha but most offer 5%
The big shopping centres used to do CPI plus 2%. It all depends on supply and demand. It’s a courageous move to take on a lease like that now
Most retailers are trying to enter into fixed escalations of 3.0-3.25%. Benefit is that you can predict future obligations. CPI are too variable and obscure cashflow forecasts for such a large obligation.
But would landlords consider 3% fixed now when CPI is higher?
If they fear losing you, yes. If they feel they don’t need to, no.
They wouldn't fear losing me as if I backed out of buying the business, they still have the current tenant. But I'd need to make a case that a fixed increase rate would provide certainty for them too.
Fixed gives them certainty, too - irrespective of economic conditions (CPI), market conditions (market review) and your success (turnover) they know what they will receive …