Hotels: With rents that can be set daily, freehold hotel owners (land and buildings plus the hotel) are arguably the most inflation-protected real estate investors.
On top of that, demand for tourist accommodation in many parts of the country is at record highs, with no signs of slowing down despite allowing outbound travel.
Average daily room revenues for Sydney, Brisbane, Melbourne and Perth are above 2019 levels.
But the sector could fall victim to its own success amid heavy investment in new products. Inflationary pressures on fuel prices could also dampen demand.
Self-storage: Among the industrial sub-sectors, self-storage is the best hedge against inflation. This is partly because (like hotels) rents can be adjusted frequently. Also since the pandemic, demand has increased as people have used their homes more.
Self-storage is also considered a “sticky” sector (once people sign short-term leases, they’ve been known to stay and not shop around when rents go up).
Rising out-of-pocket expenses, including operator fees, are of concern, and low barriers to entry could drive up supply.
Industrial: The common use of triple net leases – where tenants bear most operating and maintenance costs – makes the industrial a great choice in times of rising inflation.
Salespeople also use it to their advantage. SPC recently sold a Shepparton factory at an impressive 6.1% return, largely through a 30-year net triple sale-leaseback with fixed CPI plus 0.75% rent increases.
Essential services: At times during the pandemic, it was the best performing sector as landlords suffered no rent loss. Essential services assets, including nurseries and medical centers, are in a strong position despite inflationary pressure, with many tenants able to withstand rent increases.
Student accommodation: The sector is gearing up for an influx of international students this year, which will provide landlords with a small win in revenue for the first time since 2020.
Despite the inflationary backdrop, a major construction boom is underway, affecting supply and potentially rental growth.
Office and retail owners are more exposed to inflation risk.
Desk: Despite the good news that people are returning to offices, albeit in suburbs and regions, office owners are vulnerable to inflation.
The latest occupancy data from the Property Council reveals that all major capitals remain below pre-COVID levels, with Sydney only back to 55% and Melbourne to 48% last month.
Here, it’s the tenants who decide – and most are asking for longer leases with fewer rent reviews.
Owners of coworking offices could be considered more protected against inflation than a traditional office owner, as they have the option of increasing their rents (usually paid as a monthly subscription).
Detail: In addition to inflation affecting the amount of money consumers can spend, the large private equity that has bought malls during the pandemic for major makeovers has the potential to annihilate demand in retail districts. older or smaller, where many investors hold shares.
Institutional owners are also getting creative, lately seizing essential services (medical centers, car dealerships, etc.) in a bid to drive customers back to malls.
Although real estate is considered a good anti-inflationary, it would be wrong to draw a permanent link from it. Emerging sectors, such as rental construction and tiered family living, may also affect demand.
It is difficult to try to predict the ultimate outcome of inflation, but investors can prepare by investing in safer long-term assets.