REITs and the Mechanics of Inflation Hedging
Two factors make REITs an effective inflation hedge. The first is that REITs offset changes in the consumer price index with rent increases. Most property sectors, such as retail and office properties, are characterized by multi-year lease contracts in which rents are adjusted upward automatically to compensate for increases in the CPI. Other sectors of the commercial real estate industry with shorter lease terms, such as multifamily housing, can implement rent increases to keep up with inflation as their shorter leases expire. Hotel REITs essentially can implement price increases on a daily basis.
REITs pass their net income through to their shareholders in the form of dividends. REIT dividend growth parallels growth in the Consumer Price Index. Source: NAREIT.
REITs also provide inflation hedging benefits because, in times of increasing inflation, many investors move money into real assets, such as real estate. Because REITs are real estate in a securitized form, increased demand for REIT shares produces a nearly real-time increase in REIT share prices and shareholder value.
Price returns of equity REITs increase with inflation. Source: NAREIT.