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Tuesday, 9 October 2012

Bean Counting - Changing RPI & Index-Linked Rent Reviews



The Office for National Statistics (ONS) has started a consultation, which runs until 30 November 2012, on changes to the calculation of the Retail Prices Index (RPI).

The changes being considered to the RPI’s formula are likely to make the RPI move more slowly in line with the Consumer Prices Index (CPI) and close the gap between the two indices.

One of the CPI’s key differences from the RPI is that it doesn’t reflect the cost of buying and owning a home.

There's already been much comment on the detrimental effect a change to RPI might have for example on pensioners’ incomes – see this report from the BBC.

It might also affect the value of some property investments.

RPI is sometimes used as the basis for reviewing rent under a commercial lease as an alternative to fixed or open market rent reviews.

When adopting index-based rent reviews, landlords have tended to prefer RPI to CPI because it rises at a faster rate than CPI.

If the method of calculating RPI slows its rate of increase, this will obviously slow the rate of increase of rents which are reviewed on that basis too.

This shows the dangers for landlords inherent in opting for index-linked reviews, especially in long leases.

The index can be manipulated for reasons that are remote from questions of property valuation – political ones for example.

It’s hard to draft around this in ways that will be effective over a long period.

And more generally, although indexation may be a convenient way of trying to preserve the purchasing power of the rent a landlord receives, it doesn't reflect the trend in rental values – which is, arguably, what a rent review clause is really meant to do.

Photo by Thomas Claveirole via flickr

2 comments:

  1. I agree with your general sentiments but an index linked review would be preferred by most landlords in the current market

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  2. I'm sure most landlords would be glad of any type of upwards only review at the moment given the average length of a lease term in 2011 was below 5 years!

    ReplyDelete