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Brutal Rents Show Property Investing’s Inflation-Tracking Power

12 October 2023

 

In Boston, capital of the US state of Massachusetts, the rental market is brutal. Would-be renters are competing fiercely for apartments and entering bidding wars to secure a roof over their heads.

The same is true of other cities in the US Northeast, and in other parts of the world like the United Kingdom. Here the competition among renters is so intense that there are 20 requests to review each available property, according to data recently reported by the BBC, the UK national state broadcaster.

While local factors such as a shortage of housing alter the dynamics in each area, broadly speaking rents rise roughly in line with inflation in many developed countries across the world. In fact, in the recent burst of rapidly rising inflation since 2022, rents on a range of types of property have been a key part of the inflationary mix.

This illustrates the appeal of real estate as a whole as an investment at such times. Commercial real estate, too, has a reputation for being a good hedge against inflation. That’s often because leases on assets like warehouses or shops may either be directly linked to a measure of inflation, like consumer price inflation, or have an option to increase the rent when there is a break clause.

From the US to the UK and Germany

Turning back to the residential market, how has it performed against inflation over time? That depends on the country but, broadly speaking, rents have risen when inflation has, although sometimes with a lag.

The United States is the world’s second largest real estate market by value (China is the biggest). Looking back more than 10 years, residential rents have closely tracked US inflation, as the chart below shows. In fact, the average annual rate of rent inflation spiked at about 16% in 2022, according to Zillow, the US real estate marketplace. More recently, though, the rate of rental increases has slowed as the Federal Reserve’s policy interest rate rises have begun to quell inflation.

US Residential Rents Increase With Inflation

Source: Bloomberg.

Other countries where inflation has been running rampant recently have had a similar experience. Take the United Kingdom: here rent increases were averaging at about 6% across the country in the summer of 2023, according to the country’s Office for National Statistics. That was roughly in line with inflation at the time, although the UK consumer price index had briefly peaked at over 10% in late 2022.

In the interests of balance, though, one should also mention Germany where regulation caps the amount that landlords can increase rents. That has clearly limited rent rises to about 2% a year, even though consumer prices were increasing at a rate of close to 12% at their peak in late 2022 (see chart).

In Germany, Rent Controls Keep a Lid on Rises

Source: Bloomberg.

Top 100 Real Estate Stocks and a 4% Income Yield

It’s clear that real estate’s ability to track inflation – offering a hedge – varies from one country to another. Indeed, just as there are hot spots like Boston or the United Kingdom where tenants compete fiercely for homes, so too in countries like Germany rents are carefully controlled.

That’s why the VanEck Global Real Estate UCITS ETF is diversified across markets and stocks from across the world. A single trade buys a real estate portfolio consisting of the top 100 real estate stocks. And while more than 65% of the portfolio is invested in the United States, only just over 2% is in the smaller real estate market of Germany. Investing in this ETF is also associated with risks, including the loss of capital.

For investors, the other appealing feature is that like real estate itself the ETF pays out a high income that should have a degree of inflation proofing – in fact, it currently pays a dividend yield of more than 4%1.

1 No guarantee of future results.

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This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.

This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).

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