Real estate for inflation hedging

With inflation heating up investors are running for cover and global markets have become wonky. Pictet Asset Management in its report ‘Real estate in an era of inflation’ says that real estate can provide a partial hedge against rising prices in this time of great uncertainty.

Real estate investments garner interest as people tend to turn to real assets in times of economic turbulence. While real estate may not be the perfect hedge against inflation, Pictet says that rents and property values tend to rise over the long term.

“We believe the current circumstances provide a backdrop that also looks supportive for real estate, in particular versus other asset classes,” writes Pictet in its report. The asset manager says there is a lot of pent up demand for the commercial and residential sectors after the two-year hiatus owing to Covid. Inflation helps push up rents and the cost of financing increases at a more modest pace, which would likely support real estate prices.

Pictet says an investor should focus on areas where rents are indexed to inflation and tenants are able to afford any increase in rent. An effective strategy is choosing an appropriate location and sector. Additionally, investing in environmentally friendly buildings provides better protection against rising operational costs. “We therefore expect an acceleration of sustainable initiatives across the real estate industry,” says Pictet.

However, construction costs are not protected from rising prices and recently prices have been very volatile. Pictet says any development activity must be considered with great care, but opportunities are still there if explored for the right time horizon.

View the full report here.