Investors seeking to cushion themselves against the adverse effects of record high inflation should consider five real estate sectors for globally diversified portfolios, research by Allianz Real Estate has found.
The firm identified prime offices in global talent pool cities; US multifamily; Europe logistics; Japan multifamily; and life sciences as the five sectors offering the best inflationary protection.
For Europe logistics, the pandemic marked a tipping point in European e-commerce adoption, its study found. Compared to 10.6% at the start of the pandemic, the online share in retail sales in Europe is now thought to have reached 14.3%. This is still behind the US (c.20%) and South Korea (>35%).
In terms of the office sector, the firm’s research shows that city centre assets near restaurants and amenities, with strong ESG, smart and user-centric credentials and good public transport will continue to be in high demand.
‘This is reflected in valuation yields compressing at a rate greater than global average office yields during the pandemic,’ said Dr Megan Walters, global head of research at Allianz Real Estate. ‘Looking forward, prime office assets will provide resilient and inflation-protected income growth, with Allianz Real Estate forecasting long-term average rental growth of 3%+ pa for top office markets.’
She added: ‘Overall, 2022 has started with elevated inflation in many countries. In this environment, we believe our five real estate sectors are among the top choices for diversified portfolios. Their attractive investment proposition is based on inflation-linked income streams, through lease indexation or inflationary market rents in the long run, and a sizeable yield spread over real risk-free rates.’
Allianz’s research, which is based on proprietary analysis of 40-year data, comes at a time of heightened investor nervousness about inflation, which has been exacerbated by geopolitical tensions over Russia’s invasion of Ukraine.
Even before the Russia-Ukraine conflict, several firms – including asset managers Blackstone and Principal Global Investors - had issued special reports on inflation as a risk to watch, as highlighted by PropertyEU’s Outlook 2022 edition.
According to Allianz Real Estate, CPI inflation climbed to 7.5% in the US and to 5.1% in the eurozone in January 2022 – among the highest readings for decades.
‘But even with record inflation levels and uncertainty, our analysis shows real estate can provide long-run protection for investment portfolios,’ said Walters.
The firm analysed office sector yields in New York, London, Paris, Frankfurt and Sydney and found rents have grown in line with inflation and real rents have been relatively stable within the context of real estate cycles. Allianz Real Estate’s office portfolio covers around 225 assets in 47 cities.
‘Real government bond yields are a key benchmark for real estate yields and the spread between the two is a risk premium for owning property,’ said Walters. ‘Historically, the long-term average for this premium was in the order of 340 basis points for our five markets. At year-end 2021, however, the spread was 515 bps, providing a strong and attractive cushion against rising real bond yields.’
