Worse, rising costs are coupled with slowing growth, due to the same supply chain disruptions and the uncertainties surrounding conflict in Ukraine, as well as the lingering effects of the COVID-19 pandemic.

The spectre of stagflation, a period of high inflation but declining growth, is looming for the first time since the 1970s, when an oil price shock triggered inflation and recessions. For consumers, the effect of rising prices is worsened by stagnant wages, while inflation destroys the value of their savings.

According to HSBC, “Asia is facing an inflation shock, and growth is bound to wobble as a result.” High energy prices will be inflationary and slow demand for Asian exports, hitting growth.

Economists incline to the view that current inflation will not be sustained over the longer term, which means no stagflation. However, they also agree that we are in for a period of somewhat higher inflation and somewhat lower growth – fawn-flation…?

In theory, real estate is considered to be a useful hedge against inflation because rents move up in response to inflationary pressures. However, this response is much stronger when inflation is driven by economic growth rather than rising costs. Over the long term, MSCI data for the UK (which has the longest historical dataset for real estate) show property returns are more correlated with economic growth than inflation. This suggests a period of higher inflation and lower growth will not be good for real estate.

Nonetheless, the picture here in Asia is a little rosier. The region remains the world’s growth engine; the Asian Development Bank predicts Developing Asia GDP growth of 5.2% this year and 5.3% next, compared with inflation of 3.7% this year and 3.1% in 2021. China growth will be sluggish (5% in 2022 and 4.8% in 2023) due its slow emergence from the pandemic but India is set for 7.5% GDP growth this year and 8% next. Even China’s slowdown must be seen in the context of global GDP growth of 4.1% in 2022 and 3.2% in 2023 (World Bank).

Furthermore, the characteristics of Asian real estate offer more inflation protection: we have generally shorter lease terms, which mean landlords can push rents upwards, and supply is constrained in most sectors and most markets. Rising construction costs mean there is less chance of oversupply in the immediate future.

The outlook differs across real estate sectors. The industrial and residential sectors in particular are supported by strong demand from tenants and investors, while we have seen huge interest in offices in certain markets, such as Australia. Meanwhile, the resumption of international travel is set to boost the hospitality sector.

Overall, there is much to be cheerful about. Asia will not be unscathed by higher inflation and lower growth, but relative to the rest of the world, it is in a strong position and its real estate more so.

Further reading:
Savills Hong Kong research

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Simon Smith