Inflation hedging and UK commercial property

Abstract

Suggests that recent attempts to measure the inflation‐hedging characteristics of commercial property use an inappropriate methodology. As a result the conclusions of much of this body of work are of dubious value. Having an income and capital repayment linked to inflation, index‐linked gilts appear to be a good hedge against inflation. Applies traditional regression‐based inflation hedging tests to UK index‐linked gilts. The tests suggest that index‐linked gilts are not a hedge against inflation. There is an anomaly. The anomaly is resolved through explicitly defining a hedge against inflation and, given the definition, building a model to test if index‐linked gilts are a hedge against inflation. Concludes that index‐linked gilts are a hedge against inflation and that the regression‐based methodology is an inappropriate one. Given this finding, uses the procedure to assess the inflation‐hedging capacity of a single standard UK commercial property. It is found that property is around 20 per cent prone (80 per cent inflation proof). Finds the impact of the number of years between reviews, the level of yield and the level of gearing to be significant in the inflation‐hedging capacity of UK commercial property. Finally, the assumption of single property is relaxed to consider the characteristics of the portfolio of investment. This does not significantly change the results.

Citation

Schofield, J.A. (1996), "Inflation hedging and UK commercial property", Journal of Property Finance, Vol. 7 No. 1, pp. 99-117. https://doi.org/10.1108/09588689610111647