THE INFLATION HEDGING EFFECTIVENESS OF U.S. COMMERCIAL PROPERTY

Abstract

This study examines the relationship between commercial property return and inflation rate in the U.S market from 2001 to 2012. It was motivated by the introduction of the new REITbased property indices, FTSE NAREIT PureProperty Index Series, which provide greater unique features than any used-to-date data set. I employed the Ordinary least square multiple regression analysis, suggested by Fama and Schwert (1977). Different properties types including apartment, hotel, healthcare, office, industrial and retail were tested. Moreover, two different versions of property return, leverage and deleverage, were used to examine the effect of financing decision on inflation hedging characteristics of real estate. This study also examined the effect of global financial crisis on hedging ability of U.S. Commercial properties. The result shows that leveraged properties in general offer a significant hedge against inflation. However, the same conclusion does not hold for deleveraged properties. Different property types show a discrepancy in the ability to protect investors from inflation. Surprisingly, hedging ability of properties has been improved a lot after the global financial crisis.