RIP to the RPI?


The Retail Price Index (RPI) has been a thorn in the side of all affected lessees of public houses since its introduction all those years ago, primarily by the then Enterprise inns. It was seen by both Enterprise and the other pubcos and later Brewers as being a measure to protect their income derived from rent by the annual inflation increases linked to RPI. We have always put the case forward that it is all very well for the landlord to protect his income but annual increases in rent have no bearing on a pub’s profitability. This constantly erodes the annual trading income. The rent just inexorably just keeps on going up. Yes, there is the chance to redress the balance every five years on an upwards and downwards rent review but only if you are supply tied. There is no such option if you are free of tie as you have no alternative but to suffer upwards only annual rent reviews.


The RPI was the only Government-backed measure of inflation until the late 1990s. At that time the Consumer Price Index (CPI) was created to bring inflation statistics in line with international standards. The RPI has been widely discredited as it contains an upwards only bias that in real terms overstates price growth. The CPI does not fall into this trap. RPI based Inflation is looked upon as positive even if prices fall and then rise again to their original level within a month.


In the week of 17th August 2020 the Office of National Statistics stripped the RPI of its national statistics kitemark. The index will continue to be published because parts of the economy have become institutionally reliant. For example, rail fares are linked to RPI as is the massive Gilts Market which directly links to state pensions and government bonds. Sajid Javid, the former Chancellor last year set out plans to reform the fundamentally flawed RPI and its eventual replacement by the CPI. The underlying truth is that the CPI always runs at a lower rate of increase than the now formally discredited RPI. Those formalities will occur between 2025 and 2030.


Why is all this important to the Hospitality industry and to pubs in particular? If you are supply tied you can redress the balance by a downwards rent review after three or five years at a formal rent review. No such opportunity exists being free of tie. The team at M & C are of the firm view that even if you are converting to MRO and have an RPI supply tied lease you should now ditch RPI and instead have CPI at continuing lower rates. The POB will naturally resist at every turn but they will still have indexation but at a fairer and internationally recognised rate. If you have never had an index-linked uplift in your current supply tied lease then resist totally the insertion of ANY form of indexed uplift in a new MRO arrangement. A couple of recent disputed MRO cases handled by the team at M & C have underscored this very point.


RPI is now on its way to the scrap yard. The CPI must be the only relevant measure of inflation. The POBs should do well to accept this fact.

'Market Intelligence, Information, Insight & Inspiration'

  • Facebook
  • Twitter
LEGAL

Copyright © 2020 Morgan and Clarke – All Rights Reserved. Arkwright Asset Management Ltd T/A Morgan & Clarke Chartered Surveyors

Registered Address – 80 Shirehampton Road, Stoke Bishop, Bristol. BS9 2DR