SIMON BROWN: I am now talking with Garreth Elston of Reitway Global about the impact of inflation on REITs, real estate investment trust stocks. Garreth, I appreciate your early morning as always.
Inflation and Reits? Clearly, inflation has arrived – the debate is how long will it last and where are interest rates going? Let’s stop this for a moment and [consider] intuitively if inflation is necessarily bad for REITs, is it neutral, or is it even potentially positive for these real estate investment trusts?
GARRETH ELSTON: The general assumption is that inflation is bad, which is actually wrong. Generally, inflation is an opportunity for REITs to see their rents improve. It is also normally an indicator of a growing and performing economy, and this translates into more positive results.
I’ll give you an example, a very recent study done by Cushman and Wakefield on international markets, primarily in the United States, looking at about 40 years of data.
What they found was that for every 1% increase in inflation, total REIT returns would increase on average by about 4.5%. Of course, some sectors would increase even more than that.
For manufacturers, for example, it increases by around 6.4% on average. So the numbers also confirm that. But in the short term, we often see people freaking out a bit, unfortunately.
SIMON BROWN: … I take the point you mentioned, the economy is growing – and I understand that. But I imagine the increases for a lot of leases and such are going to be CPI-related, which means you almost just lock them in – [there’s] not even a negotiation; you signed this lease three years ago?
GARRETH ELSTON: Yes. With a large number of companies, inflation being historically so low so far, they have not been able to exercise these in certain markets. So now they finally have the ability to push that through, and push through hard enough. Obviously you don’t want the economy to go completely the other way and inflation to get out of hand, but [in] in a controlled way, it is in fact very positive for the sector.
SIMON BROWN: Yeah. Agree on that. We don’t want runaway inflation, but a little isn’t necessarily the worst thing. Of course, within REITs, there are sectors; there are manufacturers on one side and offices on the other.
We have already discussed office. Almost in a sense, we are nearing the end of the pandemic. Things are starting to look up. It almost gives them some kind of extra push in what could be a good year and maybe a few good years for the REIT sector – or am I maybe being a little too optimistic?.
GARRETH ELSTON: No, I think we have a return to normalcy, which is great. It’s been a rough few years, especially for sectors like retail, but it’s looking a bit more positive and things are getting back to something closer to normal. I think we expect to see a few more positive years. It will certainly not be without volatility. It never stops.
But in general, things become somewhat normal. The only latecomer [where] we’re probably still waiting to see how things are likely to pan out in the office, but our view has always been pretty consistent on this: that as things get back to normal, the office will more than likely return to a normality much larger than people assume.
SIMON BROWN: A fair point to make is that in many cases – and we see this through listed stocks – they are a little better off. They reduced their debt. They got rid of some non-essential, maybe class B assets that they had. They are generally looking for better positions and prices are at or slightly below Nav rather than the premium we were paying five years ago.
GARRETH ELSTON: Yes. It’s a global phenomenon that the Reits of today are not the Reits of 2008. They’ve solved their debt problems, the debt maturities are much longer, the vast majority of the debt is fixed. It is all good. They know where things are going over long periods of time. So it’s very different from how things were and I think we have a lot of people assuming that you’re going to have the same kind of problems in the industry. They focus on the last crisis, which is not where we are now.
SIMON BROWN: Yes. We really have to look to the future. Garreth Elson from Reitway Global, I appreciate the insights this morning.