Inflation fears have gripped markets in recent weeks, dampening investor optimism surrounding the global economic recovery from Covid-19. In the UK, inflation more than doubled last month, while US inflation rose 4.2% year-on-year in April – the highest level recorded since 2008.
While equities and other risk assets have displayed heightened volatility recently due to renewed inflation concerns, one segment of the stock market has proven to be more resilient during periods of price pressures – real estate investment trusts (REITs). Below, one investor examines the prospects for REITs should we witness a sustained inflationary environment.
Jon Cheigh, CIO and head of global real estate at Cohen & Steers: “As investors adjust asset allocations for the shifting market environment, we believe REITs today are especially appealing. Just as Covid-19 upended the REIT market in 2020, we believe real estate could directly benefit from vaccine distribution and the massive fiscal stimulus introduced in the past year – even as rates rise. In particular, property types that were disproportionally affected by social distancing measures, including hotels, retail and offices, stand to benefit directly from the economic reopening.
“Real estate sectors tend to have varying sensitivity to economic growth based on lease durations. Property types with shorter lease durations – such as hotels, self-storage, apartments, senior housing operating assets and billboards – may benefit more from economic expansion, as landlords can quickly adjust rents to capture rising demand. Other sectors with longer lease durations, such as net lease companies, often have explicit rent escalators tied to a published inflation rate.
“Consequently, REITs have historically responded favourably to inflation surprises, compared with the negative impact on stocks and bonds. Active REIT managers who understand these differences can position portfolios to potentially take advantage of changes in interest rates and inflation expectations.”