Editing Supermarket Income REIT
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Given the non-discretionary nature of most grocery sales, supermarkets have historically benefited from an inflationary environment, with their ability to pass on supply chain cost pressures through price increases. In February 2022, the 12-month rate of RPI was 7.1%, the highest rate of increase since March 1991, while CPI increased by 5.5%, the highest rate of increase since March 1992. The Bank of England continues to expect a moderation in inflation as commodity prices stabilise, supply shortages ease and global demand rebalances, but this is far from assured, and has surely been deferred by the continued rise in oil and commodity prices amid international tensions and war in Ukraine. | Given the non-discretionary nature of most grocery sales, supermarkets have historically benefited from an inflationary environment, with their ability to pass on supply chain cost pressures through price increases. In February 2022, the 12-month rate of RPI was 7.1%, the highest rate of increase since March 1991, while CPI increased by 5.5%, the highest rate of increase since March 1992. The Bank of England continues to expect a moderation in inflation as commodity prices stabilise, supply shortages ease and global demand rebalances, but this is far from assured, and has surely been deferred by the continued rise in oil and commodity prices amid international tensions and war in Ukraine. | ||
SUPR benefits in two ways from this inflationary tailwind. The first is through the inflation-linked rental uplifts that apply to 85% (76% RPI and 9% CPI) of passing rent, although this is capped at an average c 4%. The second is from the beneficial impact that may be expected on operators including the linkage between store turnover and the determination of market level rents. SUPR estimates that its average rent to turnover ratio across the portfolio is c 4% | SUPR benefits in two ways from this inflationary tailwind. The first is through the inflation-linked rental uplifts that apply to 85% (76% RPI and 9% CPI) of passing rent, although this is capped at an average c 4%. The second is from the beneficial impact that may be expected on operators including the linkage between store turnover and the determination of market level rents. SUPR estimates that its average rent to turnover ratio across the portfolio is c 4%,2 which it believes indicates that rents remain highly affordable. | ||
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* Inflation-linked rent increases provide good income protection against inflation, provided inflation does not rise too far. SUPR’s inflation-linked rents, 85% of the total, are capped at an average level of c 4%. Rental income will lag higher rates of inflation. Were higher rates of inflation to have a negative impact on economic growth, the relative security of the tenant base, and its ability to pass on inflationary supply chain pressures, is in contrast to much of the mainstream commercial property market. | * Inflation-linked rent increases provide good income protection against inflation, provided inflation does not rise too far. SUPR’s inflation-linked rents, 85% of the total, are capped at an average level of c 4%. Rental income will lag higher rates of inflation. Were higher rates of inflation to have a negative impact on economic growth, the relative security of the tenant base, and its ability to pass on inflationary supply chain pressures, is in contrast to much of the mainstream commercial property market. | ||
* As noted above, debt facilities currently amount to c £794m with an average term to maturity of around four years. Increasing interest rates negatively affect borrowing costs in respect of the fully floating rate debt, but index-linked rates are currently increasing at a faster rate. A material rise in long-term interest rates, also at historically low levels, could negatively affect valuations across the commercial property sector. | * As noted above, debt facilities currently amount to c £794m with an average term to maturity of around four years. Increasing interest rates negatively affect borrowing costs in respect of the fully floating rate debt, but index-linked rates are currently increasing at a faster rate. A material rise in long-term interest rates, also at historically low levels, could negatively affect valuations across the commercial property sector. | ||