What the ban on upwards-only rent reviews means for the industrial sector

RENT REVIEW STRUCTURES AND MARKET DYNAMICS

In the industrial market, the two main rent review mechanisms are Open Market Rent Reviews (OMRRs) and index-linked reviews, typically with cap-and-collar protections. Hybrid “higher of” models are also common. While upwards-only clauses are standard in OMRRs, recent years of rental growth have rendered them largely redundant in practice.

With index-linked reviews, even if collars were no longer enforceable, actual rental reductions are unlikely due to the low risk of sustained deflation across typical five-year review cycles.

Historically, landlords preferred OMRRs during high-growth periods, while tenants favoured indexation with the cap and collar giving greater certainty around future rents. Now, with rental growth forecast to slow to 2.3% CAGR (2026-30) (vs. 7.4% over the past five years) and inflation remaining sticky, landlord appetite for OMRRs is waning anyway.

We could see preferences shift further in this direction, with landlords leaning towards indexation (due to greater security), and tenants increasingly open to OMRRs due to the slower rental growth environment.

OCCUPIER MARKET IMPLICATIONS

Uncertainty around the legislation is likely to extend occupier decision-making timelines and dampen leasing activity in the short term. However, this could also lead to more ‘sticky’ tenants, with rents unable to be over-inflated when the market moves a tenant may be more likely to renew.

Lease lengths are generally becoming shorter, with tenants increasingly wanting greater flexibility and the balance of negotiating power shifting in favour of occupiers. However, tenure decisions in terms of lease length will continue to reflect operational needs (rather than review structure): tenants investing in their premises typically seek long leases, while 3PLs often match lease terms to short-term contract durations.

INVESTMENT MARKET IMPACT

With UORRs, investors have a secure income stream for at least five years and can calculate with not less than that income for the remainder of the lease term. The removal of upwards-only clauses introduces less predictable income streams, increases perceived risk and potentially dampening investors expected returns due to lower income growth and softer exit yields.

Active asset management strategies, previously attractive due to strong rental growth potential, could become less appealing, dampening investment into outdated or secondary stock.

Strategically, investors may gravitate toward index-linked leases or fixed uplifts to mitigate income risk. Rent review structure could become a key factor in portfolio risk assessments as well as valuations. There may also be greater focus on long-term leases with strong covenant tenants.

Valuations may shift, with yield spreads emerging between assets on legacy terms versus those on new, more flexible leases.

Our analysis of historical rental growth and inflation data over the past thirty years indicates that “higher of” and upward‑only rent review clauses have had limited influence on long‑term average rental growth across the UK. However, their value lies in downside risk protection, allowing landlords to crystallise income growth during upturns whilst safeguarding against downturns.

During severe downturns, upward‑only rent reviews prevent rental income from falling in line with broader market declines. In periods of negative rental growth, notably 2008–2012 and 1991–1995, upward-only clauses would have protected landlords from downward adjustments. Investors have historically priced this income certainty into yields, reinforcing the strong appeal of industrial real estate to institutional investors such as pension funds or insurance companies that depend on predicable income flows.

However, performance varies significantly across markets and assets, and not all segments track the UK average. In the absence of upward‑only rent reviews, secondary assets and locations—where rental growth tends to be weaker or more volatile—are perceived as higher risk. This is typically reflected in higher yields for secondary stock and a widening yield gap relative to prime assets.

Our analysis of rental growth across the upper and lower quartiles shows that open‑market rental growth in the lower quartile (the weakest 25% of the industrial market) has consistently underperformed inflation. As a result, index‑linked rent reviews are likely to become more prevalent in secondary locations or assets as a means of mitigating downside risk.

DEVELOPMENT OUTLOOK

Rising borrowing costs and greater uncertainty around income predictability will increase the threshold at which development becomes viable, likely leading to reduced supply in the medium term (in turn, this may drive higher rental growth for new, high-quality stock).