Many investors will have an internal view on the outlook for inflation, so how should this be translated into a forecast for retail rents?

All else being equal, higher prices tend to be reflected in higher retail rents. However the relationship also depends on the wider economy, especially consumption, which is predominantly driven by employment levels and wage growth.

Plotting the relationship between inflation and real household spending, we see the recessionary periods of the early 1980s and 90s, when high inflation was associated with weak consumption growth, and the boom times of the late 80s and 90s, when consumption grew strongly. In 2019 we experienced low inflation and low consumption growth, a combination that would be expected to be associated with a real-terms fall in retail rents.

So to estimate future retail rental growth we also need a view on household spending growth. The RES baseline scenario over the next five years (from Oxford Economics) is for the dreaded combination of low inflation (after the current burst) and weak consumption growth. Hence our forecast is for very modest retail rental growth in nominal terms, but a small fall in real terms.

Disagree? That’s fine, our clients can directly over-write the economic assumptions in the RES Forecasting Model with their own. For more information on the Model and to book a demo please email contact@realestatestrategies.co.uk

*2020-21 omitted due to impact of the pandemic