The rise in inflation might have been expected to result in a surge in performance from inflation-linked leases.

Supermarkets provide an interesting example. The Colliers Grocery Real Estate Report from January 2022 noted the long lease terms in the sector, with older leases typically referring to RPI, while newer leases use CPI, although many leases have caps at around 3 to 4%.

So what happened to income from supermarkets in 2022? Despite RPI reaching 13.8% and CPI reaching 10.5%, supermarket net income growth reported by MSCI was only 1.9%. This low growth can be attributed to various factors, including the cap on rental increases and lease regears that involved rent reductions or rent-free periods, as noted in the Colliers report.

While the inflation-linked reviews may not have kept pace with inflation, they have still managed to generate higher rental income than would have been the case with open-market rent reviews, with the levels of rent passing at the end of 2022 exceeding rental values by over a quarter.

Looking ahead, online grocery growth has contributed to a decline in supermarket rental values since the GFC, despite the intense competition from Aldi and Lidl, and a vacancy rate below 1%. It is expected that online grocery growth will continue for some time, although it is not certain, with a click and collect model potentially being more economical.

In the RES Asset Allocation Model we assume future long-term real rental growth of -0.75%. As a result of the inflation-linked reviews, we project slightly stronger increases in rental income. For more information on the Model and to book a demo please email contact@realestatestrategies.co.uk.