Investors Bet on Real Estate as Inflation Hedge

Real Estate Less Price Sensitive Than Other Investments

Some investors looking for protection from rising inflation are turning to real estate. Real estate stocks are up 14% this quarter so far, outperforming the broader stock market.

Many investors are moving into real estate because they are concerned that rising prices will chip away at company profits and prompt the Federal Reserve to raise interest rates earlier than forecasted. Historically, real estate has been an attractive investment during periods of rising inflation because rents are less price-sensitive than other goods and services. Consumer prices rose 5% in May—the biggest jump in close to 13 years—which has caused many investors to be concerned about price-sensitive industries and to turn to real estate.

Real Estate Stocks Surge

Boston Properties (BXP) and Equinix (EQIX), two large real estate companies, have seen their shares surge about 20% since the start of the quarter. Earlier this week the real estate sector was trading at nearly 24 times next year’s earnings. In comparison, the S&P 500 was trading at about 21.5 times future earnings.

These trends contrast with last year when the real estate sector fell 5.2% amid pandemic shutdowns. Shuttered restaurants and shops and a shift to remote work left buildings vacant. Mall operator Simon Property Group (SPG) saw its shares fall 43% in 2020. So far in 2021, the stock is up 54%.

Details Matter

Real estate investments can differ greatly. Investors looking to break into real estate have to pay close attention to the terms of leases. Office and retail rental leases can last for years, so it’s important to adjust for inflation.

If inflation continues to climb, it could fuel even more investor interest in real estate. If inflation slows down heading into the fall as some predict, price-sensitive companies may become more attractive to investors. Time will ultimately tell where inflation ends up, but for now real estate seems to be a popular way to try and hedge against it.

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