UK - Commercial real estate in the UK does not provide a hedge against inflation, according to research commissioned by the Investment Property Forum (IPF).

Neil Blake, director of economic analysis at Oxford Economics, told delegates at the IPD/IPF Property Investment Conference 2010 that UK property ultimately benefited from a low inflationary environment and that equities provided a better hedge.

"While UK property delivers positive long-run real returns, it is not, in most cases, a hedge against inflation, where a hedge is defined strictly as moving at the same time as inflation, or reacting to it, rather than merely keeping pace with it over time," he said.

But Blake also showed that real estate was strongly correlated with economic growth unlike equities, which appeared to have no relationship with GDP.

Andrew Smith, IPF chairman and head of global property at Aberdeen Asset Management, said the findings were important for multi-asset portfolio allocation decisions.

Smith, who was moderating the IPF research session at the conference in Brighton, England, remarked that real estate investors had been brought under the assumption that the asset class was an inflation hedge.

The findings come soon after Dutch pension fund experts and academics questioned the effectiveness of property as a hedge at a meeting of the Dutch association for institutional real estate investors IVBN.

When asked about residential real estate in the UK, Blake said he expected it would act more like a hedge against inflation compared with commercial property, but he said this was not part of the IPF brief and so had not been included in the research.

Delegates also learnt that an investor's outlook for inflation and GDP should have significant implications for his real estate asset allocation decisions.

Blake said investors who expected strong growth and low inflation over the coming years should allocate heavily to real estate, as it would outperform equities and bonds in this environment.

But he added investors were predicting stagflation should consider not investing in property at all.

Furthermore, investors should avoid pursuing higher returns through higher-risk real estate strategies if they expect inflation and GDP to be low, Blake said.

The research also found that office and industrial real estate was a better hedge against inflation than retail, and so the former two should be favoured if there is thought to be a risk of high inflation.

Retail and industrial assets tend to be substitutes for one another, with retail being preferred when inflation is low and industrial when inflation is high.