Rising prices are now a global concern. And when inflation rears up, there are few places for investors to hide. Real estate could provide a partial hedge. Particularly at a time when there is great uncertainty, not only about inflation and growth, but also about geopolitics, Covid and more.
In times of economic turbulence, people have tended to turn to real assets – including bricks and mortar – as tangible stores of value. A similar logic applies when inflation is spiralling higher.
Real estate is by no means a perfect hedge against inflationary pressures. But over the long term, rents and property values do tend to rise alongside other prices, giving real estate returns a positive correlation with inflation.
When inflation heats up, there are few places for investors to hide. Real estate could provide a partial hedge.
Of course no period in history is the same. However, we believe the current circumstances provide a backdrop that also looks supportive for real estate, in particular versus other asset classes. This is for several reasons. Firstly, although global growth has slowed, there is pent up demand for commercial and residential property in most sectors. This comes after a two-year period in which the supply of new buildings virtually ground to standstill due to a Covid-inspired hiatus in construction.
Secondly, while there is uncertainty over whether central banks can strike the right balance between controlling inflation and avoiding recession, there is broad consensus on one point. Inflation is expected to outstrip interest rate rises, particularly in Europe. This imbalance is good for heavily indebted governments as it effectively devalues their debt burden. And it is also helpful for real estate as inflation helps push up rents, while the cost of financing increases at a more modest pace. This dynamic should, in turn, help keep a lid on capitalisation, or cap, rates – effectively the yield on real estate, measured as a ratio of net operating income to property value – and support real estate prices.
In our experience of previous rate hike cycles, interest rates need to rise by more than 150 basis points before that feeds through into cap rates. Today, even after the recent hawkish comments from the European Central Bank, markets are pricing in only 75 basis points of hikes by year-end.1
Important legal information
This marketing material is issued by Pictet Asset Management (Europe) S.A.. It is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The latest version of the fund‘s prospectus, Pre-Contractual Template (PCT) when applicable, Key Information Document (KID), annual and semi-annual reports must be read before investing. They are available free of charge in English on www.assetmanagement.pictet or in paper copy at Pictet Asset Management (Europe) S.A., 6B, rue du Fort Niedergruenewald, L-2226 Luxembourg, or at the office of the fund local agent, distributor or centralizing agent if any.
The KID is also available in the local language of each country where the compartment is registered. The prospectus, the PCT when applicable, and the annual and semi-annual reports may also be available in other languages, please refer to the website for other available languages. Only the latest version of these documents may be relied upon as the basis for investment decisions.
The summary of investor rights (in English and in the different languages of our website) is available here and at www.assetmanagement.pictet under the heading "Resources", at the bottom of the page.
The list of countries where the fund is registered can be obtained at all times from Pictet Asset Management (Europe) S.A., which may decide to terminate the arrangements made for the marketing of the fund or compartments of the fund in any given country.
The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments or services.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. The management company has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested.
The investment guidelines are internal guidelines which are subject to change at any time and without any notice within the limits of the fund's prospectus.
The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a specific security is not a recommendation to buy or sell that security. Effective allocations are subject to change and may have changed since the date of the marketing material.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares.
Any index data referenced herein remains the property of the Data Vendor. Data Vendor Disclaimers are available on assetmanagement.pictet in the “Resources” section of the footer.
This document is a marketing communication issued by Pictet Asset Management and is not in scope for any MiFID II/MiFIR requirements specifically related to investment research. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any products or services offered or distributed by Pictet Asset Management.
Pictet AM has not acquired any rights or license to reproduce the trademarks, logos or images set out in this document except that it holds the rights to use any entity of the Pictet group trademarks. For illustrative purposes only.