THE INFLATION-HEDGING CHARACTERISTICS : PROPERTY VS PROPERTY STOCKS

Abstract

Traditionally, real estate has been regarded as a good hedge against inflation. Together with the imperfect nature of the real estate market, there is opportunity for investors to reap an above average rate of return which can protect them against inflation risk. Recently, investment in listed property stocks have also grown in popularity among individual investors, fund managers and institutional investors. Given the substantial interest and investment in property and property stocks, no studies have yet attempted to make a detailed comparison between investment in real estate and investment in property stocks to determine which investment vehicle is a better hedge against inflation. This dissertation therefore aims to investigate, empirically, the historical inflation adjusted return performance of direct and indirect properties in Singapore against observed, expected and unexpected inflation over a period of 18 years from 1978 to 1995. For this purpose, an inflation-hedge model is formulated following previous literature. Using three different approaches to estimate expected inflation, correlation and multiple regression analyses were performed. The entire 18-year period is further divided into two sub-periods: period of high inflation and period of low inflation for a more representative study. The results suggest that quarterly real estate returns are generally a good hedge against observed, expected and unexpected inflation for the period of study. However, detailed analysis indicates that property returns performed better in its ability to hedge against the expected component of inflation for two out of the three approaches adopted while the other approach indicated otherwise. When further broken down into sub-periods, the high inflation period results further demonstrate that real estate is a good hedge against all components of inflation. On the other hand, the low inflation period produces results that indicate an indeterminate hedge against both expected and unexpected inflation. As for property stocks, the results vary depending on the approach employed for estimating expected inflation. Nevertheless, the general observation is that property stocks are indeterminate hedge against inflation. All in all, this study has contributed further evidence to suggest that real estate, when compared to property stocks, can be considered as a better hedge against inflation.