Investors should question conventional wisdom on real estate investment trusts (REITs) and start using them as an inflation hedge, according to Resolution Capital.
Andrew Parsons, Resolution Capital’s chief investment officer, said there’s plenty of evidence to demonstrate that REITs were not highly correlated to rising interest rates and bond yields.
“It’s a simple catch-phrase that the market focusses on without actually looking at the history of returns,” Parsons said.
“You have to look deeper into what’s actually driving the economy and real estate fundamentals to understand the true effects of rising interest rates.
“A classic example of that was in 2020 where we had falling bonds and falling interest rates and yet REIT prices actually fell.
“So, to us it’s a common error for people to focus on the simple thought that rising interest rates are bad for REITs, the historic evidence does not show that clearly, whatsoever.”
Parsons said in the current global climate, rising construction costs would likely become a strong tailwind for REITs.
“There’s been a great deal of talk about the rise in consumer price index (CPI) pressure and certainly that shift from services to goods has distorted supply chains and as a consequence there has been inflationary pressure,” Parsons said.
“What we’re seeing is a very significant increase in building costs. Important ingredients in building properties have been going up at a very dramatic rate in the last 12 to 18 months.
“That’s been as a consequence of a number of factors, including the likes of the COVID disruptions, the problems with Vale mines in Brazil, a recovery in new housing starts in the US, plus the extraordinary Government infrastructure plans that have been announced which is all putting pressure on building material prices.”
Parsons said developers were facing the prospect of higher building costs and as a consequence they needed higher rents to justify making that investment in new buildings.
“If you’re an existing building owner what this effectively does is cushions you against new competition because you’ve got a cost advantage and therefore it should in fact moderate the supply picture and underpin existing property values,” Parsons said.