Real Assets

Three Reasons REITs Offer Inflation Insulation

Article

Jun 10, 2021

Inflation is a growing market concern, with many investors wondering about the implications for listed real estate. Our take: Real estate investment trust (REIT) securities can provide portfolios with insulation from inflation for three key reasons.

1. The value of the underlying real estate typically grows in excess of inflation over time.

Over the long term, the historical annual growth rates of real estate values have been significantly higher than that of Consumer Price Index (CPI) inflation. We attribute this growth to the changes in value of the tangible real assets that make up a real estate investment: buildings and land.

The value of a building can be estimated by the material and labor cost to build a replacement. The charts below show how these replacement costs (as measured by Producer Price Index (PPI) data for new industrial and office construction) have risen faster than inflation over time. Real estate fundamentals (as measured by property prices and same-store net operating income growth) have also grown faster than inflation. Although the value of real estate can move above or below its replacement cost, market supply-and-demand forces tend to push real estate values back toward replacement costs, leading to inflationary growth over time.

Real estate replacement costs have risen faster than inflation historically

2. Global real estate securities have historically outperformed in periods with above-average inflation.

We find that in periods of higher-than- expected inflation over the last two decades, global real estate securities historically generated annualized returns that were higher than those of both global equities and global bonds.

3. REITS have historically provided dividend growth that has outpaced inflation.

Over the last two decades, our research shows that the cash flow growth of global real estate securities has risen at a higher pace than inflation. We attribute this growth to the ability of landlords to raise rents in periods of rising inflation as leases expire and demand rises.

We expect REIT dividend growth will continue to outpace inflation. Many companies suspended or cut dividends in 2020 to preserve capital in an uncertain world, with dividend payments bottoming in the third quarter of last year. They are likely to increase going forward as the global economy recovers. We see dividend growth in the 8-10% range over the next two years, as companies reinstate or increase dividends, and growth in the 4-5% range over the medium to long term. Looking forward, we believe global real estate securities offer potential income growth and a valuable hedge against inflation. Read more on our views by downloading the full commentary.

Subscribe for updates

Disclosure Information
This material is not, and is not intended as investment advice, an indication of trading intent or holdings or the prediction of investment performance. All information is current as of the date of this material. Views and information expressed herein are subject to change at any time. Brookfield Public Securities Group LLC disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources however, Brookfield Public Securities Group LLC does not warrant its completeness or accuracy. This presentation is not intended to, and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service (nor shall any security, product, investment advice or service be offered or sold) in any jurisdiction in which Brookfield Public Securities Group LLC is not licensed to conduct business, and/or an offer, solicitation, purchase or sale would be unavailable or unlawful. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.