Inflation is beginning to hit the headlines again, after more than a year of being supplanted by, well, you know what. US inflation hit an annualised 5% in May, up from 4.2% in April. The US figure matters because it is still the main driver of the global economy and because it is making the strongest post-COVID recovery of any developed economy and sets the scene for what will happen in other nations once they are vaccinated and business gets going again.

Opinion amongst economists is divided over whether inflation is a temporary consequence of the post-pandemic bounce back or whether the staggering $5 trillion of stimulus packages launched by the US this year and last will drive inflation beyond the recovery period. The US is not alone, McKinsey counted a total of $10 trillion in COVID stimulus packages from 54 economies around the world as of June this year. To that can be added quantitative easing measures across a number of developed economies.

Inflation fears are not new; real estate investors have been citing it as a potential macro-economic risk in various investment intentions surveys for some years. This prompts the question, what is that risk? Or is inflation positive for real estate? Conventional investment wisdom suggests real estate provides, if not a hedge exactly, an insurance against inflation, because rents will rise as inflation rises. Naturally this rising income will be reflected in capital values.

The news is not all good, because inflation tends to lead to rising interest rates, which tend to push real estate yields upwards and the effect is more dramatic the more leverage is employed. Overstretched investors might find their rental income does not rise in lockstep with their interest payments. Short-term leases can be helpful in this case, a factor which supports investing in many Asia Pacific real estate markets, while others might offer rental increases linked to inflation.

Perhaps the most important consideration for investors in Asia Pacific real estate is not the past performance, but the effect inflation fears will have on global investors. Fears over inflation will drive more investment in real assets and some of this capital will be allocated to Asia Pacific real estate. That means even more capital chasing the sector and the likelihood of rising prices.

At present, COVID restrictions are somewhat limiting the amount of cross border business that can be done, especially for investors who are relatively new to the region. Once restrictions are loosened, we could see a new wave of capital from outside the region chasing real estate. The obvious keenness of Asia Pacific workers to return to the office will also be attractive to global investors and arguably makes office property in this region more secure than in markets where people are still talking about substantial, long-term homeworking.

Real estate investors based in this region, or with teams on the ground, have a decent head start on any new global capital and might still be able to acquire assets at a ‘COVID discount’. This could be a great time to secure assets, before prices begin… inflating.

Further reading:
Savills Asia Pacific Research

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Simon Smith