Inflation peaks but still gap for property’s ‘less favoured’ assets

Inflation could already be at its peak according to Brian Klinksiek, LaSalle’s head of European research and global portfolio strategies.

“Everyone’s talking about inflation and the impact on rates and values,” he said, adding that the mood is increasingly uncertain owing to the effects of the war in Ukraine, continued supply chain issues and lockdowns in China.

“It’s a really uncertain time for real estate,” Klinksiek told Real Asset Insight’s Richard Betts during the recent ULI conference.

“But the most encouraging thing that I’m seeing is that all the indications are pointing to the fact that inflation is probably peaking now.”

He said that central banks are a big part of that and the tightening cycle will play out over the next nine months or so, after which he expects stabilisation and a drop in inflation.

“The question is fundamentally what that does to growth. In inflationary environments real estate tends to act as a pretty good inflation hedge.” But he added that it is not a perfect inflation hedge and is uneven according to sector and geography.

“It works best when landlords have pricing power in sectors that are really supported by secular and structural change,” he added. Office markets in Europe have, relative to some office markets in other parts of the world, tended to have restricted vacancy. “We’re encouraged that inflation will be passed through into rents, which is what you need to see to support values in this kind of environment.”

The outlook for “less favoured” sectors may not be so promising. “If you asked me a few months ago I would have said, with an extremely high level of conviction, that the gap between the favoured and unfavoured sectors was healing,” he said, explaining that repriced shopping centres were attracting attention.

“The issue today is that real incomes are under pressure for consumers and that is delaying an element of the recovery.”

Click on the video to watch the full interview or listen to the podcast below.