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How To Capture Real Returns In The Property Market?

Many investors perceive property to be a traditional and robust hedge against inflation. There has been significant research to suggest that this is true when the inflation rate is benign but does not prove to be the case during periods of inflation shocks (Hoeslil 2006).

However, property if held in the long term does prove to be a wealth preservation tool for an investor’s portfolio as the shocks in inflation over time will even out. In addition, properties with inflation linked leases offer an even greater protection against inflation compared to that of non-index linked leases.

Standard UK leases in commercial property do not provide investors with the ability to fully capture movements in the rental price. Typically, commercial leases are reviewed upwards only, which has the huge benefit of guaranteeing the income for the duration of the term at a minimum level. The cost to an investor for this guarantee is time. These leases are reviewed once every five years and as such it is ‘pot-luck’ what level the rental price will be at the time of review.

After deductions for incentives are removed from headline figures, the net effective rent has a tendency to deliver a limited or nil uplift in most cases. Income is the primary driver of total returns and annual inflation adjusted income streams are the most beneficial lease structures for driving income.

Property that offers guaranteed performance, be it index linked or fixed uplifts, let to investment grade tenants in resilient locations, provide protection against the instability in the global economy as well as the uncertainties in the property market as a whole.

Furthermore, leases of this nature have historically outperformed those with traditional “open market” rent reviews, as rents are actually cyclical, whereas inflation is perpetual.

Contrary to the popular belief in the 1970’s and 1980’s, property rents do not over long periods of time provide a hedge against inflation.