Good Hedge for Inflation: Commercial Real Estate

April 13, 2011 / Elizabeth Buckley, Commercial Property Analyst

High rates expected from commercial properties are enticing investors to use it to hedge future inflation.

Good Hedge for Inflation: Commercial Real Estate

National Council of Real Estate Investment Fiduciaries’ senior economist Ryan Severino reported that the total annual return for commercial real estate over the next two years is expected be between 10 to 11 percent, a rate considered to be fairly robust, even if consensus inflation expectations from professional business forecasters double from its current 2%.

When the returns from investing in an asset exceed the rate of inflation, it is considered to be a good hedge. Investors with increasing expectations about inflation are investing in commercial properties right now.

The recommended companies are companies that own and operate toll roads, bridges or regulated power plants under long-term concessions, in contrast to companies that merely build them or supply. Owners and operators of core assets such as toll roads enjoy high barriers to entry, stable cash flow in all economic climates and the ability to increase prices in line with inflation or economic growth. Builders and suppliers do not have this privilege, whose fortunes are on the other hand, just tied to the ups and downs of the economic cycle.

However, no matter what the concern about rising inflation is, the most important thing to do while in the situation is still to follow the basic mandate of good real estate investing which is: know your property types, know the market trends and find assets that offer a good rate. Practicing this will keep investors close to getting good returns.


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