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Wharton Professor Discusses REITs' Inflation-Hedging Benefits

06/05/2013 | By Allen Kenney

Susan Wachter, professor at the University of Pennsylvania Wharton School of Business, joined REIT.com for a video interview in Chicago at the Real Estate Research Conference at REITWeek 2013: NAREIT's Investor Forum.

Wachter has done extensive studies into the inflation sensitivity of REITs. She offered some thoughts on her major conclusions as a result of her research.

"Real estate is regarded consistently as a good inflation hedge, and it is," Wachter said. "But the question is how good are REITs, because REITs are the transparent way of investing in real estate. We studied it absolutely and relative to other hedges, such as gold, and it's the best out there. In good times and in bad times, REITs do hedge inflation."

Wachter has also looked at how issues such as debt loads affect REITs' hedging characteristics. She said she has found that REITs that rely on long-term financing have "slightly better" inflation-hedging properties.

Wachter discussed the implications of her findings for investors and investment managers.

"Real estate has also been found in the research literature as moving with the S&P 500, but the point is that it isn't just the S&P 500," she said. "It is, additionally, an inflation hedge far better than the S&P 500. Although it is in the short run correlated with the S&P 500, looking at longer-run trends, it's a far better hedge. And, substantively, if you look at the differential movements, you can see the long-term factors that are causing real estate, as reflected in REIT returns, to have a different investment performance than the S&P 500."

That means REITs offer investors a chance to diversify their portfolios, according to Wachter.

Wachter offered some suggestions on other areas of REIT research that would be worth exploring. Her ideas centered around international REITs.

"I'm curious to what extent… REITs are serving as hedges against the local currency," she said. "Our work suggests that international REITs are actually hedges against the dollar."