On lease renewal under LTA54, index-linked reviews are rebased to market rent for the initial rent.
11 May 2025(2025 May) – 1.0 Supermarket REIT plc buys supermarkets let on index-linked rents. Its debt interest rates enable it to pay dividends on the difference between rental income and operating costs (including borrowing). But how long for?
1.1 Supermarket REIT is not the only prop co that buys index-linked rented property. Almost all, if not all, the share prices of the companies with index-linked portfolios are at a discount to their NAV and some companies are puzzled what to do about it. Yet I have not found any that have publicly stated the reason as in para 3.0 below.
3.0 I have been advising a landlord of a supermarket on an index-linked rent. The lease is inside LTA54. On expiry of the lease, the initial rent on renewal will be the open market rent per s34 LTA54. The difference between the expired indexed rent and the OMR is circa £50,000 pa lower. In other words, on expiry of an index-linked lease, the initial rent on renewal is likely to be rebased at a lower rent.
4.0 Although the commercial purpose of a rent review is to enable the landlord to keep pace with changing values, there is no correlation between an open market rent based on demand and supply and formulaic rent such as index-linked. I should think commercial property investors that buy shares in quoted prop cos are aware of that. Quoted companies wondering how best to close the gap between their share price and NAV would be well-advised, I suggest, to accept nothing much to be done about it.
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