Academic Studies on REITs and Inflation Hedging

Hoesli, Lizieri & MacGregor (2008)
“For US markets, the long-run models all included expected inflation with a significantly positive coefficient. For private real estate, the coefficient was significantly less than unity. ... In all the short-run models, there was very little evidence of short-term adjustment to changes in inflation (either anticipated or unexpected). ... Adjustment was relatively slow--which provides confirmation for the argument that short-run analysis based on high frequency return data was unlikely to detect hedging qualities of assets.”

Simpson, Ramchander & Webb (2007)
“This study documents an asymmetry in the response of the EREIT returns to inflation. What this means is that EREIT returns do display a negative relationship with inflation, but this is predominantly the case when inflation, itself, is going down. Therefore, EREIT returns are shown to rise when inflation rises and to also rise when inflation decreases. The counterintuitive result of previous studies have been shown to be an artifact of the methodology they employ, which implicitly assumes symmetrical responses in EREIT returns to inflation.”

Westerheide (2006)
“Some indication for cointegration of real estate stocks with the CPI is observable in six of eight countries. In almost every country weak evidence exists for a long run equilibrium between real estate stock indicators and the CPI, indicating that real estate stocks could basically serve as an inflation hedge. ... (R)eal estate stocks provide a (weak) hedge against consumer price inflation in almost every country. This result stands in contrast to the outcome of many previous studies, which have not focused on long run cointegrating relationships.”

Goetzmann & Valaitis (2006)
“One of the primary goals of many institutional investors is the preservation of capital in real terms, and for individual investors it is building a portfolio that keeps up with the cost of living. ... Much of the paper is focused on understanding the potential weakness of reliance on historical correlations between real estate and inflation as the basis for long term financial planning. ... We found fairly convincing evidence that real estate is a relatively good asset to use as an inflation hedge, particularly over the long term. However the sub-period analysis should motivate caution--the data since 1992 suggest a somewhat weaker connection between property returns and inflation, and this may in fact be a structural change. Even under this pessimistic scenario, real estate is a better inflation hedge than stocks or a long term bond portfolio.”

Glascock, Lu & So (2002)
“Our results indicate that the observations of REIT returns as perverse inflation hedges are spurious. The observed negative relationship between REIT returns and inflation is in fact a manifestation of the effects of changes in monetary policies."

Lu & So (2001)
“Previous studies show that REIT returns and inflation are negatively related. This paper reexamines this perverse inflation hedge phenomenon by investigating the relationship among REIT returns, real activities, monetary policy and inflation through a Vector Error Correction Model. Empirical results show that inflation does not Granger-cause REIT returns and that REIT returns signal changes in monetary policy. The observed negative relationship between REIT returns and inflation is merely a proxy for the more fundamental relationship between REIT returns and other macroeconomic variables.”