My World: June 2021…

This is part of a series of articles where our contributors describe how they think things will look a year from now.

Office demand stays level, as flexible working and a move to lower density cancel each other out – but inflation is a looming worry

With business conditions improving and the second wave of covid-19 fully defeated, in June 2021 I will be explaining what the coming surge in inflation means for real estate. Bond yields will be moving out, causing acute concern that this will push cap rates out as well. To allay these fears, I will revisit 1970s real estate analysis and dig deep into CBRE’s data repository to bring a new generation up to speed on the ‘reverse yield gap’.

Real estate is not a perfect hedge against inflation, but it is a good long-term capital preserver, particularly when inflation becomes higher and more persistent. In my Property Chronicle article of this time next year, I will argue that investors should expect to see property yields slip below those of bonds as the value of inflation-linked cash flows becomes ever more apparent. Property values, I will say, are going to benefit from this surge in inflation.

For all that, the economic world will not be a happy place despite the defeat of the virus and the near resumption of normal life. The end of the 40-year bull run in government bonds will be looming, and institutional portfolios overweight in this asset class will be looking insecure, even by recent standards. Protecting pensioners and policy holders will be topic du jour.