Whether or not real estate serves as an inflation hedge is due to the owner’s ability to increase rents.
Landlords now have pricing power over renters in healthier cities where empty properties and apartments are scarce. According to a recent Nuveen Real Estate report, published on Monday, landlords have the ability to increase rents in the 50 largest cities in the United States and Europe, where job openings are below average. The most attractive real estate sub-sectors in these cities are the industrial, residential and, perhaps surprisingly, retail sectors in the United States. In Europe, industrial, residential and office real estate are the industrial sectors with the lowest vacancy rates. However, Novin stressed that retail offices in Europe and office space in the United States have above-average vacancies. With little ability to raise rents, these sectors may not protect investors from the pain of inflation.
Amid rising inflation, Nuveen Real Estate argues that rents and property values are linked to higher consumer prices. Between 1994 and the end of 2021, growth in rents – specifically the net operating income of real estate – was closely correlated with inflation.
With the demand for real estate more than the supply, owners have the ability to afford premium prices for their properties. Novin argues that the real estate sector has a unique ability to outpace market prices during periods of inflation.
“Real estate acts as a good inflation hedge because you are basically able to control inflation through higher rents,” said Shaun Lees, chief investment officer and head of money management for the Americas platform at the nearly $90 billion Nuveen Real Estate. Institutional investor.
Higher rents lead to higher cash flows and higher property values, said Lees, adding that investments can rise to match or even exceed inflation.
Ted Wozniak, head of US asset management at SEI, said he generally agreed, but stressed that real estate and real estate assets have significant shortcomings. Wozniak said that with owner-equivalent rent being 25 to 30 percent of the CPI, it stands to reason that real estate would be inflation-correlated. Secondly in a letter. “However, the challenge is that it is just an ingredient,” he said.
Wozniak said tips [Treasury Inflation-Protected Securities]He said that goods, real estate assets and real estate all offer protection, but they are not “independently perfect.”
“I think that inflation protection should come within the framework of a more comprehensive strategy, which takes into account the different components that give a beta to inflation more closely related to the CPI,” Wozniak said.
Institutional investors have made increasing allocations to the real estate market over the past decade. Les said five factors drove the flows: income, raising capital, managing volatility, diversification and hedging against inflation.
“Over the 25 years I’ve been in the real estate business, [real estate’s role as an inflation hedge] It was always point number five. Now, it’s point number one or number two,” Lis said. “Nobody worried about inflation, even two years ago.”
However, Nuveen warns that rising energy costs and supply bottlenecks may leave businesses and individuals with less money to spend on real estate.
For real estate investors, new leases in inflationary environments allow them to take advantage of rising rents. Even in long-term leases, Nuveen highlighted that contracts can include an inflation-linked rental lift.
“The current influx of inflation is partly attributable to the economy running at full speed, which is also driving up demand for real estate across the economy, driving up rents,” the report stated. “This can be seen across property types, particularly apartment rents and industrial/logistical rent growth.”
Nuveen notes that it believes investors should “play the long game” to take advantage of real estate positions as an inflation hedge. While real estate investments may be a relatively safe haven for investors in this inflationary period, the report reminds investors of exposure to a wide range of real estate markets and sectors, particularly sectors with strong fundamentals and demand tailwinds.
