Real estate as an inflation hedge: new evidence from an international analysis

Assets’ capability to hedge against inflation has again come to the forefront given the recent surge in inflation. This paper investigates the inflation-hedging capability of an important asset class, i.e., real estate, using data from 1990 to the end of 2023 across six countries. By using a Panel Markov switching vector error correction model (MS-VECM), we identify the hedging ability of real estate in crisis and non-crisis periods, both in the short and long term. Real estate provides an effective hedge against inflation in the long run, both in crisis and non-crisis periods. In the short term, real estate securities only hedge against inflation in stable periods, but direct real estate also shows desirable inflation hedging in crisis periods. Real estate (both direct and securitized) effectively serves as a hedge against inflation shocks, particularly protecting against unexpected inflation and against energy inflation during stable periods. While stocks surpass real estate (both direct and securitized) in long-term inflation protection and real estate has short-term benefits, gold distinguishes itself by offering reliable long-run protection, but only in economic downturns. The results should provide important insights to investors seeking to allocate resources more efficiently in those turbulent times, both over the short and long term.