Real estate as inflation hedge “will keep attracting capital”

Real estate’s credentials as an inflation hedge are a bulwark in these uncertain times, delegates heard at Real Asset Media’s European Debt Finance & Investment briefing, which took place recently at Corestate’s Frankfurt offices and online on the REALX.Global platform.

“Anything that’s inflation-linked is very expensive now,” said Mark Holz, group head of research, Corestate Capital Group, in his keynote presentation. “Real estate is an inflation hedge, that’s why it will keep attracting capital going forward.”

Economic growth expectations have changed in the last few months as inflation bites, fuelled by the energy crisis and the impact of the war in Ukraine.

“Rising costs of construction are a negative for the sector, but if you have a portfolio already then the situation is positive,” he said. “Real estate’s performance has been tremendous. The leasing market has been very strong too, with very sound fundamentals and a lot of investor interest.”

The short-term outlook is an increase in commodity prices, supply chain disruption, asset price inflation and slower economic growth, but predictions for the medium-term are not very different, higher prices will stay with us for a long time.

“Inflation in the next 10-15 years will be structurally higher than in the last decade, and certainly much higher than the 2% ECB target,” said Holz. “This will have an impact on interest rates, which are also expected to rise.”

The yield spread argument in favour of real estate has already begun to weaken. “The spread between the 10-year bond and office prime yields in Germany is the lowest since 2008”, he said.

Real estate transaction volumes have held up better than expected in 2020 and 2021 despite the pandemic, and Q1 this year has been very strong. Things will change because of the new challenges the market has to face, said Holz: “We expect H2 to be much slower, probably even below 2020 levels.”

In uncertain times investors’ reaction is usually to sit on the sidelines, he said, and this wait and see attitude will result in less activity in the market.

Debt finance, however, will keep going from strength to strength. This relatively new asset class in Europe has had a “good pandemic”, as it were, with many new funds opened to the public and a significant increase in the capital raised.

“Risk-averse banks reduced their lending during the health crisis, allowing private providers to come in and do a good business,” said Holz. “The capital allocation potential remained high during Covid because financing demand was so strong.”

Private debt also has an attractive risk-adjusted return profile and will continue to attract capital.

“In the debt universe there are still many opportunities to invest, as banks reduce their commitments,” said Holz. “The debt side of things has shown to be much more crisis-proof than the equity side. You can put your money to work even in difficult times.”