Inflation hits commercial property rents

Rent increases will follow fastest inflation growth in five years

Commercial property rent increases will follow fastest inflation growth in five yearsThe fastest period of inflation growth in more than five years has prompted a commercial property expert to urge tenants and investors to take extra care when negotiating rent review terms.

Statistics New Zealand last month announced the consumer price index (CPI) had increased 1.0 per cent in the three months to 31 March 2017, to an annual rate of 2.2 per cent.

It was the fastest period of inflation growth in five and a half years.

Chris Farhi, Strategic Consulting Director at Colliers International, says the increase will have a direct impact on inflation indexed rent reviews, which are usually conducted annually.

“As inflation goes up, we may see more tenants wanting fixed growth or market rent reviews,” he says.

Farhi says market rent reviews used to be more common, but developers and investors often favour inflation indexed or fixed growth reviews.

“These review terms provide more certainty around what will happen to rent over time, which helps to make properties more valuable.”

Farhi says tenants have benefited from inflation-based rent reviews due to relatively low inflation over the last three to four years.

“Inflation-based rents had been rising quite slowly, making them a popular choice for tenants, who have been getting a pretty sweet deal with inflation so low.”

However, Farhi says inflation is now returning to “normal” levels, near the middle of the Reserve Bank’s 1-3 per cent target.

“As a result, investors and tenants can expect some decent increases in inflation indexed rent.”

Farhi is advising tenants and investors alike to be careful about the type of rent reviews they negotiate.

“You need to have a clear understanding of what the options are and how they differ,” he says.

“Some parties incorrectly believe that fixed growth and inflation-based rent reviews are the same.”

However, Farhi warns there is no hard and fast rule.

“While inflation based rents can work in your favour, they also introduce an element of uncertainty relative to genuinely fixed growth,” he says.

“Whether you’re an occupier or investor, you also need to be careful about the inflation calculations underpinning each rent review.

“Make sure that the inflation indexing formula is correct, the calculations are correct, and that you’re not paying too much or receiving too little.”

Farhi advises owners and occupiers to seek professional advice like that offered by Colliers International’s Strategic Consulting business.

Farhi, a part-time lecturer for the University of Auckland’s Bachelor of Property degree programme, was recently named Young Achiever of the Year at the 2017 RICS Awards, which recognise excellence in property.

Find out more about Strategic Consulting for tenants or Strategic Consulting for owners.

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