How Will Interest Rate Rises Affect Landowners?

Interested in knowing how interest rate rises affect landowners? With interest rates at their highest levels in years, it’s crucial to discuss their impact on landowners with existing projects on their land. From rental payments to higher electricity prices, I’ll guide you through the key elements to consider.

Changes to the Bank of England’s base rate will always have financial impacts. Generally, when interest rates rise, it means higher mortgage and loan payments and higher returns on savings and investments.

However, interest rate rises can also affect landowners with renewable energy projects on their land.

This is because most landowners’ rental payments are intrinsically linked to the Retail Price Index (RPI), which increases over time. This means that these rises equate to higher rental payments.

Many believe that interest rates affect the price of electricity. But actually, the inverse is true: electricity prices have an impact on inflation, which then influences interest rates.

To clarify things, I’ll outline how interest rate rises affect landowners with existing projects on their land – and steps you can take to make the most of these rises.

For most landowners, rental payments increase with inflation – especially if your lease includes an ‘upward-only’ rent adjustment. This means that when inflation rises, your rent goes up, but when inflation slows, your rent stays the same. Understanding this link is key to making the most of rising interest rates.

How Rising Interest Rates Affect Landowners

There are a few ways you may experience the impact of rising interest rates, depending on the type of rental agreement you’ve got in place.

While interest rates do not directly impact your rental income, they may affect borrowing costs if you have loans secured against your land or business. It’s worth considering how rising rates could impact any financing arrangements you have.

Rental payments and lease agreements

The majority of landowners have fixed minimum rental payments (in addition to a contingent project revenue-based rent), which are usually linked to the RPI.

This, according to the United Kingdom Debt Management Office, is the ‘average measure of change in the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK’.

When the RPI rises, it often reflects broader inflationary trends that can also lead to higher interest rates.

Payments still increase over time

If this is the sort of payment arrangement you have in place with your developer, it means your rental payments will increase over time – good news for your finances.

You may have an RPI-linked clause in your lease agreement outlining upward-only rent adjustments. This stipulates that your rent won’t decrease, even if inflation slows later.

So, in these cases, there’s only one way that your rental payments will ever go – and that is up.

RPI to align with a different measure of inflation

However, this link to RPI is set to change. By 2030, the UK government and the Office for National Statistics (ONS) will reform RPI, aligning it with the Consumer Prices Index including owner occupiers’ housing costs (CPIH) – a measure that typically reports lower inflation figures.

For landowners with rental payments linked to RPI, this means that, from 2030 onwards, rent increases may be less pronounced than they have been in the past.

So, this is clearly one of the ways in which interest rate rises affect landowners.

Electricity prices and landowner rent

However, you may be a landowner who receives a fee based on turnover rent, which is linked to a percentage of your electricity producer’s sale price.

If your rent is based on electricity prices, your payments may increase as energy prices rise. Energy prices fluctuate due to global factors, but the key takeaway is that higher electricity prices generally mean higher rental income.

As you’re probably well aware, the price of electricity in the UK is steadily (or at times, sharply) increasing, largely because it is linked to the price of gas. At the time of writing, the cost of electricity in the UK is 24.86p per kilowatt hour (kWh).

The cost of gas has risen significantly due to global supply disruptions, including the war in Ukraine, which reduced Russian gas exports to Europe. Ongoing tensions in the Middle East and the Red Sea have also had an impact on the rising cost, where around 12 per cent of the world’s oil and gas trade passes through these key shipping routes.

Higher energy prices contribute to inflation, which can, in turn, influence interest rates. For landowners with turnover rent agreements, higher electricity prices generally mean increased rental income.

What Should Landowners Focus On?

With the above in mind, it’s worth delving into your lease and having a think about next steps.

1. Review your contract and payments

Read through your lease and rent calculations to see where you stand. Check if your lease includes an RPI-linked clause, which will see you benefiting from any rises in inflation. If it does, it’s worth reviewing how this change could impact your future rental income. 

You should also ensure any rent adjustments are upward-only, as this protects you from future decreases in inflation.

2. Potentially renegotiate your lease terms

Is your lease nearly up? Then it’s worth thinking about trying to secure a better deal – one that suits your current situation and appetite for risk.

If your rent is fixed, consider whether renegotiating the basis for future rent adjustments – such as shifting to a different inflation index or a new agreement structure – would better suit your long-term financial goals.

If you have a turnover rent agreement in place, make sure you understand how electricity prices affect payments – it may be something you want to change as part of your project renewal process.

Contract renegotiations can be tricky, so I recommend enlisting the help of experts to guide you through.

Final Thoughts

If you’re one of the many landowners whose rent payments are tied to the RPI or electricity prices, then a rise in interest rates will be good news for you.

Electricity prices are part of the equation for those on turnover-based rental agreements. Keep in mind that these are affected by electricity price fluctuations – not interest rate rises.

Your next steps? Reviewing your lease agreements now to make sure you’re maximising your rental income. And if your rental payments contracts are due for review soon, it’s definitely worth considering whether you can renegotiate a better deal.

If you have any questions as you’re going through, it’s always a good idea to seek advice to clarify any rent calculations and lease terms.

Need expert advice on your lease or rental payments? Our team has years of experience helping landowners maximise their income from renewable energy projects. Contact us today to ensure you’re getting the best deal possible.