MoFoREAL: European Real Estate Newsletter (Q2 2023)

Welcome to the latest edition of MoFoReal, our newsletter highlighting recent activities and other developments in MoFo’s European Real Estate team. In this edition, we consider the risk that power procurement poses to UK development and the implications of impending Retail Prices Index reform for commercial landlords.

As always, we hope you enjoy reading MoFoReal and invite your feedback and suggestions for future issues.

Direct power procurement is the new key to unlocking real estate development

By Oliver s’Jacob and Danielle Hirsch, partners, London

As the global population grows, accompanied by a commensurate increase in demand for housing and 21st century facilities, the public power grid is under immense pressure to generate sufficient power to drive all of this new infrastructure. New homes mean new electric vehicle charging points, more electric boilers as fossil fuel boilers are phased out, and more internet users, online gaming, and video streaming, all of which require increasing amounts of power.

This rising demand for energy, juxtaposed against increased political pressure to address climate change, means that renewable energy solutions are of growing importance to the real estate industry.

Developers need to consider adopting effective energy procurement strategies, not just to hit sustainability targets, but also to persuade planning and other authorities that their developments will not be a drain on the grid. This is of particular importance to energy-intensive developments, such as new housing estates and data centres.

Renewable power purchase agreements (RPPAs) may well provide the answers.

Read the full article on BE News, where we consider RPPAs, the implications of national grid capacity, and potential opportunities for developers and investors.

It’s a RPI off!

By Danielle Hirsch, partner, London

The calculation of the Retail Prices Index (RPI) is due to be reformed in 2030 in order to align it with the Consumer Prices Index including owner occupiers’ housing costs (CPIH). You might have heard about it in the context of defined benefit pensions, given the high-profile (and unsuccessful) application for judicial review made by Marks & Spencer, BT, and Ford last year, whose pension scheme members will ultimately be worse off as a result of the reform. The ramifications are not, however, confined to pensioners; many commercial landlords, and therefore commercial real estate lenders, will also be affected.  

What is RPI?

Inflation is currently a hot topic in the UK, as it is surging at an unprecedented rate, but how is it measured? The UK uses various indices, reflecting the period-to-period proportional change in the prices of a fixed set of consumer goods and services of constant quantity and characteristics.

RPI is an index that measures the average change, month-to-month, of the cost of specific retail goods and services in the UK, including mortgage interest payments.

How is this relevant?

Historically, where landlords have sought to hedge their inflation risk, instead of including an open market rent review in their commercial leases, annual rent payable under such leases has been calculated as the greater of:

(i) the amount payable on commencement of the lease and (ii) that figure as adjusted by the increase in RPI over a certain period of time.

CPIH generally results in a lower measure of inflation than RPI (around 1% less annually since 2011). Accordingly, if the proposed change to the calculation of RPI goes ahead, such rent payments (and therefore annual rent increases) will consequently be lower than has traditionally been the case.

Read our full Client Alert, where we consider this issue in greater depth and offer some practical suggestions.

Team news

We welcome Rahul Sagar as an associate on the Real Estate Finance team in London. He comes to us from investment management firm PIMCO, where he was senior legal counsel. While at PIMCO, Rahul was the legal lead for its debt finance desk in the UK and Europe (lender and sponsor side), while also assisting with the establishment of PIMCO Europe’s first debt finance fund specialising in senior secured lending.