Six ways to invest in an inflationary environment
UK inflation rose to 9% in April, its highest level in 40 years and almost double the rate the Bank...
While the topic of house prices and buying your first home is a conversation favourite amongst us Brits, when it comes to our investments, property just isn’t that popular. Just 1.6%* of UK retail assets are invested in the property sector *.
But, as Albert Einstein once said, “what is right is not always popular and what is popular is not always right.”
Here, we collate the views of Elite Rated property fund managers on the outlook for the sector in the coming months.
This fund seeks income and capital appreciation by investing in a diversified portfolio of REITS (Real Estate Investment Trusts) and publicly traded real estate companies. It favours companies with superior growth prospects and attractive valuations, believing global markets have the potential for superior returns.
While its latest update noted how global real estate securities declined in April, it pointed out they still managed to outperform broader equities. “We believe global real estate is attractively valued and offers the potential to mitigate inflation’s impact,” it stated. “Russia’s invasion of Ukraine has led to a commodity supply shock that has driven up inflation and raised concerns over the pace of global growth in 2022.”
Despite the possible impact of slower growth and higher inflation on listed real estate securities, the fund’s managers believe real estate fundamentals remain sound. “REITs have the potential to show meaningful cash flow growth and solid income,” stated the update.
“Traditional asset allocations may provide less safety to defend against a prolonged environment of higher inflation than real estate assets, which have historically performed well in elevated inflationary periods.”
This fund invests mainly in equities of European listed property companies and those related to the real estate sector. It is broadly diversified in terms of both geographical and sector allocation, while its largest holding is in Vonovia, the leading German residential real estate company**.
Co-managers Marcus Phayre-Mudge and Alban Lhonneur, have acknowledged that pan-European property equities have had a rough few weeks – but remain optimistic. “We still believe that the index-linked nature of much of our earnings is a significant protection mechanism in these inflationary times,” they wrote in an update.
They also see very little new speculative development coming through, given the disruption to development during the pandemic and the price appreciation of construction materials.
“The combination of supply chain disruption and tight labour markets is, clearly, causing significant supply driven inflation,” they added.
The managers also noted how markets began pricing in the likelihood of an economic slowdown, accompanied by rising base rates, as central banks tackled the risk of inflation/wage increases. “Given the market turmoil, it is not a surprise that the traditional safe haven of Switzerland continued to attract investors,” they added. “Switzerland was the only country to generate a positive performance over the month.”
The fund’s aim is to offer shareholders a consistent income stream with some capital growth by acquiring property with long leases across the UK.
Around 94% of rent reviews are linked to inflation or have a fixed uplift, rather than being subject to open-market negotiation**. This makes it attractive for investors wanting a hedge against rising inflation, especially as the Bank of England has said this is likely to hit 10% over the coming months.
In a recent update, the fund’s managers, Nigel Ashfield and Roger Skeldon, noted the benefits that the sector can provide. “With increased volatility and uncertainty in traditional asset classes, alternative sectors such as real estate can lower that volatility and provide greater diversification,” they wrote.
They also highlighted the benefits of having increased exposure to logistics, which is being bolstered by increased occupier demand and supportive dynamics in the sector. “We expect this positive capital performance in logistics to continue in the medium term but keep the portfolio under constant review to assess current and future performance of the different sectors and whether any portfolio changes could be required to benefit ongoing and future performance,” they added.
The managers are also upbeat about near-term prospects. “The fund and its property portfolio are well-positioned, and we anticipate the positive performance in property values to continue, with an annualised income return of around 3.5%, with that income return expected to grow in 2022,” they said.
*Source: Investment Association, net retail sales, March 2022.
**Source: fund factsheet, April 2022