The big Socimis, Merlin, Colonial and Lar España, will pass the CPI rise on to tenants

Merlin PropertiesMerlin: BBVA prevails in Castellana project arbitrage

Bankinter | Merlin, Colonial and Lar España foresee passing inflation on to their rents. They give assurances they will enforce contracts, just as they did when inflation was zero or in negative territory.

Bankinter’s opinion: Good news for the sector, although it should be viewed with caution. We do not think the increase in inflation is going to be applied across the board. There will be some assets requiring negotiation with tenants so as not to lose out on occupancy. That said, it is true that an environment of inflation favours raising rentals and should translate into greater cash flow generation, for the following reasons: i) Inflation-linked contracts; ii) operating costs only represent 20% of revenues; iii) energy costs are passed on to the tenant; and greater financing costs will have a moderate impact, at least in the short/medium term. The main property firms have the lion share’s of their debt at a fixed rate (80-95%) and with an average maturity of over 5 years. For that reason, we believe the sector is a good alternative investment in this environment of high inflation. We have recently included in our model portfolios: 1) Colonial: in spite of its focus on offices, it has prime locations; 2)Merlin Properties, with exposure to logistics and benefitting from the sale of BBVA branches; 3)Vonovia, European leader in residential rentals; and 4)Welltower, focused on assets linked to health, particularly old people’s homes in the US.