Inflation and Real Estate Investments.pdfVIP

Inflation and Real Estate Investments by Brad Case, Senior Vice President, NAREIT, and Susan M. Wachter, Richard B. Worley Professor of Financial Management, The Wharton School of the University of Pennsylvania. Forthcoming Introduction This paper analyzes the inflation sensitivity of real estate investments, comparing them to other inflation-sensitive assets. The most transparent source of real estate investment returns comes from publicly traded stocks of real estate investment trusts (REITs). The authors examine the available return data, with an emphasis on their relationship to US inflation, although conclusions may apply elsewhere as well. Consumer price inflation (CPI) in the U.S. was 13.5% during 1979, the worst year since 1947. Dividend income from REITs traded through the stock exchange averaged 21.2% that year, and total returns amounted to 24.4%, more than preserving for REIT investors the purchasing power that they had lost to inflation. Inflation averaged 11.6% per year during 1978-1980, the worst three-year period in six decades; again, however, publicly traded equity REITs outpaced inflation with income and total returns averaging 12.2% and 23.1% per year, respectively. The period 1974-1981 was the most inflationary eight years in the history of the Consumer Price Index at 9.3% per year, but equity REIT returns easily preserved purchasing power, with income and total returns averaging 10.2% and 16.3% per year. During the first eight months of 2011 annualized consumer price inflation was 5.1%. Again, equity REIT returns protected purchasing power with annualized total returns averaging 8.4%, however dividend income - during a period of extraordinary weakness in real estate operating fundamentals - fell short of inflation at 3.4% per year. The rate of growth of equity REIT dividend payments averaged 7.71% per year from the beginning of 1978 through August 2011, while consumer price infla