Assessing an investment market without upwards-only rent reviews

The UK is relatively unusual in its reliance on UORRs, and some sectors, such as retail, have already largely evolved away from them.

However, in sectors such as prime London offices, where leases have been shortening but are still often treated as bond-like income, UORRs are likely to have a more acute impact on their risk/return profiles, particularly at points of market stress.

This is particularly relevant for liability-matching investors, such as pension funds, which depend on secure, predictable cash flows. We could see an increase in CPI-linked (we have rarely seen material deflation over a sustained period) or fixed-uplift leases as a result. 

Looking to other markets without UORRs is helpful to assess potential long-term implications. For example, the immediate aftermath of Ireland’s 2010 ban on UORRs saw the creation of a two-tier market of legacy and new leases, with caps and collars commonly adopted. Caps and collars are currently disallowed in the new legislation impacting England and Wales, however the government has committed to consulting on the role of caps and collars before commencement.

In the short term, the enactment of legislation is likely to create sharper market impacts as investors reassess pricing and risk.

Our Active Capital survey, which captured nearly US$1.4tn of Assets Under Management, shows that regulation and tax feature relatively low in real estate decision making, with only 5% of investor respondents citing this as a top influence and 15% citing domestic politics. By contrast, interest rates, occupier demand, bond yields and demographic change are materially more important drivers. This helps reinforce that the removal of UORR may not be a decisive negative for capital, particularly when set against the potential for improved occupier certainty, reduced affordability stress and lower default risk, all of which ultimately support income durability and occupier demand.

A global perspective offers a more pragmatic assessment. Domestically, UORRs may be cited as a key to the attraction of global pension capital to UK Commercial Real Estate. However, there is evidence that their appeal may be overstated: since 2020, the most active markets for international pension capital investment (excluding the UK) have been Australia, the United States and Japan. Notably, none of these countries include upwards-only rent review clauses in their typical leasing arrangements.