Strong assets, not rent reviews, are best hedge against inflation, says REIT

Custodian REIT has dismissed investors using rent reviews as a hedge against rising inflation. In a market update this morning, the REIT said: “There is rightly a keen focus on inflation at present and questions as to whether real estate investment can offer a degree of inflation hedging. In short, the answer must be yes.” But it added: “The aim is to provide inflation protection from the bricks and mortar, not the lease contracts.” It acknowledged that because of five-year gaps between reviews and breaks, “Investors should not expect a straight-line relationship between rents and inflation.” As such, “much focus is currently on RPI and CPI-linked rent reviews, which of course provide shorter-term comfort”. But it cautioned that an over-reliance on index-linked rent reviews can lead to disparity between investment values and underlying property values. “Over the long term we do not feel indexed rent reviews are a worthy substitute for owning good real estate, where we back open-market rent reviews to deliver rental growth”. The logistics sector is “strongly positive”, the industrial-heavy REIT said, despite recent jitters caused by Amazon’s announcement that it had taken on too much space. “Market sentiment remains strongly positive for industrial and logistics, notwithstanding recent uncertainty in the big-box sector caused by Amazon’s announcement of excess warehouse capacity,” Custodian said. The firm said it had increased its net asset value per share by 28% over the year to 119.7p, up from 113.7p in December and 97.6p in March 2021. NAV currently stands at £527.6m. The total portfolio was valued at £665.2m, up from £637.9m in December, thanks to a £20.5m valuation lift and £5m from asset management initiatives.   To send feedback, e-mail piers.wehner@eg.co.uk or tweet @PiersWehner or @EGPropertyNews