Effectiveness of property as inflation hedge ‘questionable’


According to IP Real Estate, UK – Real estate’s effectiveness as an inflation hedge is “questionable” as the asset class is unable to react quickly to increasing inflation, M&G Investments has said.

Speaking at conference organised by the UK National Association of Pension Funds, Dermot Kiernan, fund manager at M&G, also warned that UK investors were currently investment shy, with supply growth limited to central London units.

Referring back to an Investment Property Forum survey conducted last year, he said real estate’s use as an inflation hedge was dubious.

Kiernan’s comments come a week after it was announced the UK retail prices index (RPI) for August had risen to 5.2% – up by 0.2 percentage points over August – while the consumer prices index rose 0.1 percentage points to 4.5% month-on-month.

“Property is often talked about – it’s a throwaway comment almost – as a good hedge against inflation,” he said. “It’s questionable. A hedge is really something that should react pretty quickly to increasing inflation.”

He said that while property was unable to offer this instant correlation, it was “pretty good” as the widespread use of upwards-only leases offered a degree of comfort to investors.

“The exception to that – and they have been one of the most strongly sought after investments in the market – are those leases that specifically give you an RPI link.

“That’s why you’ve seen incredible demand for Tesco leases, for example,” Kiernan said, referencing a number of deals between institutional investors and one of the UK’s largest supermarket chains.

The company has agreed a number of sale and leaseback deals with pension funds in the past, including one of the UK’s largest schemes – the £32.2bn (€36.6bn) Universities Superannuation Scheme.

A second, unnamed pension fund in 2009 bought more than a dozen stores, as well as two distribution centres for £514m, while agreeing 30-year, RPI-linked leaseback deals with the supermarket.

Kiernan questioned how much growth would be witnessed in the next few years, saying that capital growth would be the “light at the end of the tunnel” and that investors instead had to focus on income from leases.

He also said banks and institutional clients were reluctant to invest outside of London.

“We are seeing some recovery in central London, but, as a very broad statement, the supply pipeline is very limited,” he said.