Home • PRRES Inc. Journal • Read the Journal

Commercial Property as an Inflation Hedge: An Australian Perspective

Author/s: Andrew Leung

Date Published: 1/01/2010

Published in: Volume 16 - 2010 Issue 1 (pages 97 - 115)

Abstract

There is ongoing interest in assets with inflation hedging capabilities, as many investors’ liabilities are linked directly or indirectly to inflation, which cannot be assumed to be forever benign. Numerous studies have shown that equity and bonds are poor at hedging inflation. In contrast, property presents itself as a candidate for this task, by virtue of rental structures that are linked to inflation. Though the intuition for property as an inflation hedge sounds encouraging, overseas experience has been mixed, and there is limited evidence for Australia. This paper applies established analytical approaches to Australian data for commercial property in examining its inflation hedging capabilities. It finds that Australian property at an aggregate level can provide a good hedge for both expected and unexpected inflation, even after allowing for the effect of tax in reducing investors ‘ returns.

Download Full Article

Download the Full Article PDF

14445921.2010.11104297.pdf 14445921.2010.11104297.pdf (547kB)

Keywords

References

  • Australian Bureau of Statistics (2008), 6401.0 Consumer Price Index, Australia.
  • Baum. A. E.and B. D. MacGregor (1992). The Initial Yield Revealed: Explicit Valuations and the Future of Property Investment, Journal of Property Valuation and Investment 10(4), 709–726.
  • Brueggeman, W. B., A. H. Chen, and T. G. Thibodeau. (1984). Property Investment Funds: Performance and Portfolio Considerations, AREUEA Journal 12(3), 333–354.
  • Chatrath, A., Liang, Y. (1998): REITs and Inflation: A Long Run Perspective, Journal of Real Estate Research, 16, 311–325.
  • Chaudry, M, Meyer P.C. N. and Webb J.R., (1999), Stationarity and Cointegration in Systems with Real Estate and Financial Assets, Journal of Real Estate Finance and Economics, 18(3), 339- 349.
  • Chu, Y and Sing, T.F. (2004), Inflation-hedging Characteristics of the Chinese Real Estate Market, Journal of Real Estate Portfolio Management, 145–154.
  • Engle, R.F. and Granger, C.W.J (1987), Cointegration and Error Correction: Representation, Estimation and Testing, Econometrica, 55, 251–276.
  • Fama, E. F., and G. W. Schwert, (1977) Asset Returns and Inflation, Journal of Financial Economics, 5, 115–46.
  • Goetzmann, W. N. and Valaitis, E. (2006) Simulating Real Estate in the Investment Portfolio: Model Uncertainty and Inflation Hedging, Yale ICF Working Paper No. 0604.
  • Hartzell, D., J, Hekman, and M. Miles. (1987), Real Estate Returns and Inflation, Journal of the American Real Estate and Urban Economics Association, 15(1), 617–637.
  • Hoesli, M., Lizieri, C., and MacGregor B.D., (2006) The Inflation hedging Characteristics of US and UK Investments: a Multi-factor Error Correcting Approach, Journal of Real Estate Finance and Economics, 36(2), 483–206.
  • Hoesli, M., Macgregor, B.D., Matysiak, G. and Nathakumaran N. (1997), The Short-Term Inflation-Hedging Characteristics of U.K. Real Estate, Journal of Real Estate Finance and Economics, 15, 27–57.
  • Huang, H and Hudson-Wilson, S.(2007) Private Commercial Real Estate Equity Returns and Inflation, Journal of Portfolio Management, 63–73.
  • Liu, C. H., D. J. Hartzell, and M. E. Hoesli, (1997), International Evidence on Real Estate Securities as an Inflation Hedge, Real Estate Economics, 25(2), 193–221.
  • NERA Economic Consulting (2007), Bias in Indexed CGS Yields as a proxy for the CAPM risk-free rate,.
  • Newell, G. (1996), The Inflation-Hedging Characteristics of Australian Commercial Property: 1984–1995, Journal of Property Finance, 7:1, 6–20.
  • Reserve Bank of Australia (2008), Publication F02: Capital Market Yields, Government Bonds.
  • Sing, T.F. and Low, S.H., (2000), The Inflation-hedging Characteristics of Real Estate and Financial Assets in Singapore, Journal of Real Estate Portfolio Management, 373–385.
  • Westerheide, P, (2006), Cointegration of Real Estate Stocks and REITs with Common Stocks, Bonds and Consumer Price Inflation, Discussion Paper No. 06–057, Centre for European Economic Research.
  • Wurtzebach, C.H., Mueller G. R. and Machi, D.(1991) The Impact of Inflation and Vacancy on Real Estate Returns, Journal of Real Estate Research, 6, 153–68.