Direct commercial property for inflation proofing returns

Whilst headline inflation stood at 2.8% in April, according to the Consumer Prices Index (CPI) measure, the Retail Prices Index (RPI), often referred to as a more realistic measure of inflation, stood at 4.5%.

Both measures are significantly higher than the government and Bank of England inflation target of 2% and at these rates inflation will erode savings from all but the best high street savings accounts.

The inflation proofing nature of direct commercial property income is often overlooked when seeking a defence against value of money erosion. UK commercial property rents are based on long-term leases, typically 15 or more years in length. It is widespread practice to have five-year upward-only rent reviews built into leases. A good manager ought to be able to negotiate rental increases in excess of CPI or RPI. These practices have helped to ensure an inflation-beating income return from direct commercial property. Whilst prices, as measured by the RPI, rose 103.5% from December 1986 to December 2006, direct commercial property income easily outpaced them, rising 190.7%.

Rob Page, marketing director, New Star Investment Funds, says: “Inflation is a silent assassin and constantly erodes our personal wealth. It should be the primary concern of every investor to beat inflation and during times of inflationary pressure investors would do well to consider direct commercial property.”