Originally published August 2021.
Hedging your bets.
As the rhetoric around inflation has increased, so too has scrutiny around commercial property, an asset class typically perceived to offer an inflation hedge.
First, there are questions around what measure of inflation property is meant to hedge against – the difference between CPI and RPI, for example, is 0.7% pa over 30 years. The time horizon of inflation also matters: do investors require a very long-term hedge or should they only hedge when real-term values are most under threat? Also, what attribute of performance is meant to be hedged? While most investors cite capital values, institutions sometimes need to match inflation-linked liabilities, meaning rental values are more important.
Let’s not forget too, that property is a very different asset class from 30 years ago, in terms of sector weights, income security (shortening leases) and sector characteristics (the changing nature of retail, for instance).
A perfect property hedge would be one that is highly correlated to inflation or exceeds it. But commercial property has offered, at best, a partial hedge. Analysis (Property Market Analysis, June 2021) shows that, historically, offices had a very good correlation with inflation. The industrial sector was also correlated but less strongly, while retail had a much weaker relationship. Our own analysis of rental and capital values using the MSCI sample since 1981 suggests only residential and parts of the alternative sector have offered growth in real terms.