Safe as offices: Commercial real estate as a hedge against inflation
The first half of 2022 has forced equity investors to think carefully about their exposure to fluid economic conditions. With interest rates heading higher as central banks take action against inflation, investments that did well in the past two years have come under heavy pressure. A torrid first half of the year has taken the decline in the S&P 500 to 23% since the start of 2022 – and nearly 32% for the growth-focused Nasdaq-100 index.
The outlook for the global economy and markets has turned perilous. On top of persistent inflation, the Russia-Ukraine war and renewed Covid-19 lockdowns in China have dimmed growth prospects in the near term. Economists have warned that the US may be heading for a recession as higher rates sap consumer spending. More than 60% of global CEOs expect a recession by the end of 2023, according to a survey released in June by the Conference Board.
Certain sectors and asset classes can be expected to offer greater protection against inflation and rising interest rates than others, though.
Take commercial real estate for example. While residential real estate tends to struggle when interest rates push up mortgage costs, commercial landlords are able to pass on increased costs to their business tenants, helping commercial properties hold their value.
Major investors are paying attention. Commercial property investment soared 55% in 2021 to a record $1.3 trillion in 2021, according to CBRE.
The Covid-19 pandemic has slowed the growth of premium office rents in major cities, but it has not proven to be the end of office life that many had predicted. According to real estate specialists JLL, established markets like London have largely maintained top rents for premium office buildings. The UK capital is not alone: office costs in Midtown Manhattan have increased since 2020 to tie with Hong Kong’s Central district for the world’s most expensive office market per square foot.
Commercial real estate, of course, is still affected by the prevailing uncertainty. It is impacted by all the macro factors that are affecting equities, with the added unknown of how quickly workers will return to offices in the post-pandemic era.
While some may want to diversify away from the sector, others see opportunity. British Land, a FTSE-100 listed property developer, recently sold a major London office development to Singapore sovereign wealth fund GIC, which is adding to its portfolio of prime London properties.
Positive equity
In the equity markets, rental income from offices and shopping malls also supports equity valuations and may prove especially attractive for investors looking to switch from growth to value stocks. For equity investors who are focused on cashflows, real estate investment trusts also offer predictable distributions even in turbulent times.
Gaining exposure to real assets does not necessarily mean selling shares to fund bricks-and-mortar purchases. Through securities-based financing, long-term shareholders can access funds for any purpose without sacrificing the potential for long-term capital gains or dividend accumulation. This financing tool can be used to help add commercial property stocks to a diversified equity portfolio, or invest in bricks-and-mortar assets themselves.
Leverage existing assets to finance investment can also make sense in a period of higher inflation because borrowers benefit as the value of money declines, which reduces the value of their obligations in real terms.
EquitiesFirst provides progressive capital for accredited investors, professional investors, and otherwise qualified investors with experience of securities-based financing. Our products offer funding for any purpose – including for investors who wish to increase their exposure to commercial property.
The first half of 2022 has forced equity investors to think carefully about their exposure to fluid economic conditions. With interest rates heading higher as central banks take action against inflation, investments that did well in the past two years have come under heavy pressure. A torrid first half of the year has taken the decline in the S&P 500 to 23% since the start of 2022 – and nearly 32% for the growth-focused Nasdaq-100 index.
The outlook for the global economy and markets has turned perilous. On top of persistent inflation, the Russia-Ukraine war and renewed Covid-19 lockdowns in China have dimmed growth prospects in the near term. Economists have warned that the US may be heading for a recession as higher rates sap consumer spending. More than 60% of global CEOs expect a recession by the end of 2023, according to a survey released in June by the Conference Board.
Certain sectors and asset classes can be expected to offer greater protection against inflation and rising interest rates than others, though.
Take commercial real estate for example. While residential real estate tends to struggle when interest rates push up mortgage costs, commercial landlords are able to pass on increased costs to their business tenants, helping commercial properties hold their value.
Major investors are paying attention. Commercial property investment soared 55% in 2021 to a record $1.3 trillion in 2021, according to CBRE.
The Covid-19 pandemic has slowed the growth of premium office rents in major cities, but it has not proven to be the end of office life that many had predicted. According to real estate specialists JLL, established markets like London have largely maintained top rents for premium office buildings. The UK capital is not alone: office costs in Midtown Manhattan have increased since 2020 to tie with Hong Kong’s Central district for the world’s most expensive office market per square foot.
Commercial real estate, of course, is still affected by the prevailing uncertainty. It is impacted by all the macro factors that are affecting equities, with the added unknown of how quickly workers will return to offices in the post-pandemic era.
While some may want to diversify away from the sector, others see opportunity. British Land, a FTSE-100 listed property developer, recently sold a major London office development to Singapore sovereign wealth fund GIC, which is adding to its portfolio of prime London properties.
Positive equity
In the equity markets, rental income from offices and shopping malls also supports equity valuations and may prove especially attractive for investors looking to switch from growth to value stocks. For equity investors who are focused on cashflows, real estate investment trusts also offer predictable distributions even in turbulent times.
Gaining exposure to real assets does not necessarily mean selling shares to fund bricks-and-mortar purchases. Through securities-based financing, long-term shareholders can access funds for any purpose without sacrificing the potential for long-term capital gains or dividend accumulation. This financing tool can be used to help add commercial property stocks to a diversified equity portfolio, or invest in bricks-and-mortar assets themselves.
Leverage existing assets to finance investment can also make sense in a period of higher inflation because borrowers benefit as the value of money declines, which reduces the value of their obligations in real terms.
EquitiesFirst provides progressive capital for accredited investors, professional investors, and otherwise qualified investors with experience of securities-based financing. Our products offer funding for any purpose – including for investors who wish to increase their exposure to commercial property.
