As Megan Greene explains, the big worry for policymakers and financial markets recently has been the return of inflation. What should you own to insulate yourself from the effects? There are no perfect answers. Some swear by gold, though its effectiveness over short periods is patchy. Another common suggestion is commercial property: offices, retail and industrial buildings. The theory is that commercial property values rise over time with economic growth, and leases usually link rent increases to inflation, providing a hedge against rising prices. There is some truth to this, but there are also compelling reasons to treat the notion with caution and to explore other options.
For one thing, commercial property is highly cyclical. Any benefit you receive on the income side from inflation-linked rents is easily wiped out by market shocks that hit capital values, such as happened after the Brexit vote and again in March 2020. I am much more comfortable treating commercial property as a contrarian play—something to buy when it crashes and sell on recovery—rather than as an evergreen buffer against rising prices. This is especially true now, when changes to our working and shopping habits during the pandemic have made the long-term outlook for commercial property more uncertain.
The open-ended fund structures that many private investors use to buy into commercial property are another reason for caution. These funds allow investors to ask for their money back with no notice. When a lot of people want out at the same time—because property prices are falling—the fund managers are left selling buildings into a falling market to release the cash. This pushes prices lower. To avoid this, these funds have several times ended up barring all redemptions, locking investors in for months at a time. Regulators are looking at ways to address this unhappy cycle by forcing people to give six months’ notice to withdraw, but 75 per cent of investors say they would not invest under those conditions.
Against this background, the inflation-smoothing attributes of commercial property look distinctly tenuous. A better answer might be high-quality companies that sell essential everyday items and have the pricing power to pass on cost increases to their customers. The catch, however, is that these shares are rarely—if ever—cheap.
