Listed Real Estate as an Inflation Hedge across Regimes

The unconventional monetary policy measures during COVID-19 and the recent increase in economic uncertainty have reignited the debate about the medium- to long-term resurgence of inflation. This project aims to deepen our understanding of the inflation-hedging properties of real estate and other asset classes using a regime-switching cointegration technique. In addition, this project will identify the optimal strategic asset allocation for hedging inflation risk across different regimes. The simulations will take into account serial and cross-sectional intertemporal dependencies in the relationship between asset returns and various economic variables across different investment horizons. Specifically, this project addresses the following research questions:

• How high is the inflation hedging potential of listed real estate (LRE) compared to other forms of investment such as equities, infrastructure, gold, and white precious metals?
• How does this inflation hedging capability change over time?
• What is the optimal allocation for a given target return and investment horizon?
• How should the allocation strategy change in different regimes?

Relevance for market participants: The proposed approach can be applied by long-term institutional investors (especially pension funds, which typically operate under inflation-related liability constraints) and by private investors for whom real capital preservation is a minimum objective.

Relevance to EPRA priority topics: This project fits in with the priority topic of inflation hedging.

----------------------------------------------------------------------------------------------------------------------------------------------------------

Four key conclusions can be drawn from our research:

1. LRE is a good hedge against inflation, but mainly for expected inflation and in the long term. In addition, LRE offers better protection against inflation than equities in the long term.
2. The short-term hedging ability becomes negative in times of crisis. In non-crisis times, REITs offer good protection against inflation, but the ability becomes negative in times of turmoil.
3. The ability of REITs to hedge inflation also varies between sectors and countries.
4. We determine portfolios for inflation hedging by minimizing the expected shortfall. This method of portfolio allocation for inflation hedging suggests that listed real estate stocks should play an important role in investor portfolios.

This research project was supported by the European Real Estate Association (EPRA).

Status: Completed, report available here:
https://prodapp.epra.com/media/EPRA-academic-research-paper-LRE-as-an-inflation-hedge-across-regimes_201222_final_1675864886221.pdf