COMMERCIAL PROPERTY AS A HEDGE AGAINST INFLATION

Abstract

While funds invested in bonds or other investments with a relatively fixed return are subject to the effect of declines in the purchasing power of the dollar caused by inflation, funds in real estate are generally not so exposed. This study seeks to investigate whether commercial properties can hedge against inflation or not, both in general, as well as by property type. The methodology adopted follows three approaches. With Fisher's Hypothesis as the basis, the first two models, utilizing multiple regression analysis, are unable to reach conclusive results. This may be due to either the unique low-inflationary and high growth situation in Singapore or the over-simplification of the models. However, the third approach, by way of a simple, straightforward graphical method, suggests that commercial properties more than adequately compensates the investor for the erosion in purchasing power caused by inflation. Due to severe data limitations, this study cannot extend the findings to all commercial properties. However, an investor seeking long term inflation protection certainly must consider commercial properties as one of the key vehicles for investing some portion of his funds, especially where frequent re-negotiation of rents is possible and the property is located in an area not likely to deteriorate.