Strong recovery underway – The Property Chronicle
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Strong recovery underway

Golden Oldie

But what challenges await the US and the wider world?

Over a year after the Covid-19 pandemic spread across the world and crippled economic activity, a recovery is underway. The consensus among economists is for the recovery to be strong, which has only been amplified in recent months and justifiably so. Vaccine efficacy, vaccine distribution progress and a substantial new US fiscal stimulus package have helped skew the balance of risks to the upside and should provide significant additional support to global activity. For property investors, this is all welcome news, but after being so focused on the fallout of Covid-19, new challenges await. 

Along with the economic recovery, it is widely expected that dormant inflation is set to awaken. Hints of inflation have already appeared in the United States and inflation has emerged as one of the most talked about concerns among investors in 2021. Base effects, supply chain constraints and pent-up demand aided by robust fiscal policy have contributed to the recent rise in concern, but market participants and policymakers are holding onto the view that a surge in long-run inflation is unlikely. 

For property investors, who tend to have longer investment horizons, trend or long-term inflation can help navigate periods of temporary turbulence. Cyclical oscillations around trend inflation have been well documented throughout recent history, while the long-term structural drivers of inflation identified pre-pandemic remain largely unchanged today. These factors anchor the belief that outsize inflation will be largely transitory. Nonetheless, there are still implications for the property markets.

“Lease structure can dictate whether scheduled rent increases will be able to keep pace with inflation”

Leases are one part of the puzzle where inflation can come into play for property investors. Lease structure can dictate whether scheduled rent increases will be able to keep pace with inflation, if landlords can pass on expense increases to tenants, or if increases in pass-thru expenses are capped.

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