Thursday, May 22, 2008

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Investment Property Vs Inflation

Reuters says:

LONDON (Reuters) - Real estate has a justified reputation for protecting the investor from inflation -- but only in the long-term and only if it is the right kind of inflation.

Based on the relatively transparent British market, commercial property has generated an inflation-adjusted return of more than 5 percent a year since 1970, according to data from Investment Property Databank (IPD).

But much like gold -- another classic inflation hedge -- real estate's relationship with inflation can fluctuate, not least if economic activity slows and corporate tenants and rental growth come under pressure.

"Because property returns are not linked to inflation in the short-term there is no rush to move back into property just because we have inflation," said Rupert Clarke, chief executive of Hermes Real Estate, which helps to manage the retirement savings of Britain's telecommunication and postal workers.

"Stagflation" is a term coined in the UK in the 1960s to describe a combination of higher prices and economic stagnation -- namely slower growth and rising unemployment. TWIN CHALLENGE

The ramifications for property are complex.

"When we've had inflation-only in the economy, real estate has provided an inflation hedge," she said.

The question is, which kind of inflation?

Commercial property investments are better placed to generate consistent above-inflation returns when price pressures are a symptom of a healthy economy and result from higher spending and income.


In the long-term, the rent commercial property would be expected to attract on the open market at any given time -- the Estimated Rental Value -- is highly correlated with inflation.

"All the analyses show that over the long-term property is a good inflation hedge," Hermes's Clarke said.