The Consumer Price Index has reached its highest figure since September 2000. The recent June quarter result pegged the index at 6.1 per cent, a cause for worry among retailers across Australia, particularly those who are leasing their premises.
“This will be the death notice for those retailers who are still getting over the initial COVID-19 wave and struggling with the current COVID long wave,” Phil Chapman, Director of retail leasing firm Lease1, said, adding that the last time the market experienced high levels of inflation was as a direct result of the global financial crisis in 2008-09. And even then, he points out, the CPI did not reach the figure recorded this quarter.
The last time the index reached such heights was in 2000, when the Goods and Service Tax (GST) was introduced. Aside from those two events, Lease1 noted that the Consumer Price Index only hit at an average of 2.92 per cent as the market for retail rents has enjoyed relatively low- to mid-range inflation. Even during the height of the pandemic, when retail activity was largely affected by the lockdowns imposed, the index average was only at 2.11 per cent.
“These are significant periods of stable inflationary outcomes across the CPI which all retail rents are
either directly or indirectly tied to,” Chapman said. “What do we mean by directly and indirectly? If your annual rental increase states something like ‘Consumer Price Index Sydney’ or ‘Weighted Average All Capital Cities’, then your rental is increased by the quarterly CPI aligned with your lease anniversary.
“You are still directly affected if your rent review is a combination of CPI for example: CPI + one per cent, %, CPI + two per cent,” Chapman added. “Both of these types of rental reviews are directly tied to the release from the Australian Bureau of Statistics each quarter for the CPI.”
Lease1 is reminding retailer-lessees to check their lease and determine the type of rent review method(s) that will apply and assess how this unique period of “generation inflation” will compound their rent over the term of their lease.
“The issues the market will experience now based on this inflationary spike is that there are a lot of leases tied to a combination method (i.e. CPI + two per cent) which, based on the June result, will equate to unsustainable rent increases circa + eight per cent,” Chapman explained. “Also, any leases on a lower fixed increase of between three per cent to four per cent will be under a lot of pressure at the lease renewal to be increased to five per cent (or higher) under the guise of meeting the market, noting that historically these spikes are short-lived,” he concluded.
