RPI: pub rent rises by another route

New pub company leases that offer annual rent increases in line with the Retail Price Index should be treated with scepticism, argues Garry Mallen.

Retire Possibly Insolvent may be a better explanation of RPI (Retail Price Index), or at least a more likely outcome, if you agree to have it attached to the rent on the majority of new leases offered by the major pubcos.

These are the same pubcos that have claimed to the Business Innovation & Skills Committee, and anyone else who will listen, that they no longer rely upon "upwards only" rent-review clauses within their leases.

I will argue that an RPI increase is an annual increase with no chance of a decrease, except in very rare circumstances.

I have stated this before and I know I am not alone in doing so, but I have yet to be offered a credible reason for using this particular index.

RPI, as the name suggests, is a retail price indicator that has no relevance to commercial leases within the public-house sector.

RPI as an index has gone down only on nine occasions in 50 years, all of which were in 2009, so you can forgive me for not accepting the argument that it can go down as well as up. It may do, but it's extremely unlikely.

Lease deal​

I was recently asked by a client to consider the implications of him taking a new 15-year lease with a major pubco.

For the purposes of this article, the heads of terms (the agreement in principle) for the proposed lease shall be hypothetical and are as follows:

• 15-year term (this could be shorter or longer)

• Full tie, including wines, spirits and minerals

• Discounts circa £50 per barrel on qualifying products

• Gaming machine tie 50/50 after rent to an approved supplier

• Lessee responsible for all repairs except structural

• Rent subject to RPI without cyclical reviews

Also for the purposes of this article I will concentrate purely upon the RPI element of my advice. On considering the effects of RPI upon the first five-year term of the lease, I have made some assumptions:

• Income growth based upon 5% per annum due to increased prices, but a small drop in demand. There are not many companies that can claim they have managed to do this over the last five years.

• Starting with an overall GP of 56%, which given a £50 per barrel discount is optimistic, I have allowed for a gross profit decline of 1% per annum as a result of brewery increases and the duty escalator imposed by the Government.

• Overall costs ratio increases of 1% per annum, which is slightly optimistic when compared with the past five years. This increase takes into account the above-inflation price rises such as Sky TV, utilities and the additional statutory requirements being heaped upon our industry. For this example I have started with a costs ratio percentage of 38%, which is 2% below those stated (excluding management) within the Association of Licensed Multiple Retailers Benchmarking Survey 2010.

• Rent increases at 4% per year, which is also optimistic given the recent inflation figures.

Escalator​

In providing my client with a five-year income forecast (see below) I have highlighted the disparity of earnings between the tenant and the landlord, and I have no desire to open up the tie debate, I have shown it solely as an indicator of that disparity.

The table clearly shows that RPI on its own is not going to determine whether the tenant succeeds or fails, but it is another slice of the cake that is simply not affordable.

Add to that the lack of a cyclical rent review and it's difficult to see any future in the new leases.

Interestingly, Brigid Simmonds, chief executive of the British Beer & Pub Association (BBPA), is calling for the Government to scrap its duty escalator on the grounds that it will only add to increased beer prices, which will increase RPI.

More than half the country's tenanted pubs have RPI attached to their lease and Mrs Simmonds stated in a recent article: "At the end of this chain reaction, real people in real pubs lose their jobs and vital community assets are lost."

I fully support the BBPA claims to Government regarding the duty escalator and would ask Mrs Simmonds to recommend the same action to the very people that she represents, because with RPI attached to their leases, very real people will also lose their businesses and their homes.

Garry Mallen is a rent expert and was a member of the Royal Institution of Chartered Surveyors Pubco Forum that examined valuations and rents.​