From the Columbia Business School via the SSRN:
“Real” Assets
Abstract:
Traditionally, “real” assets such as inflation-indexed bonds, commodities and real estate were thought to have correlate well with inflation and thus provide protection against rising price levels. But many of these assets turn out not to be that “real.” While a single real bond provides a constant real return by definition, real bonds as an asset class has a correlation with inflation close to zero. Among commodities, only energy has been a decent inflation hedge. Gold, surprisingly, has been a poor inflation hedge. Real estate has some, but certainly far from complete, inflation-hedging ability. Cash (T-bills), in contrast, is one of the best inflation hedges.
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...7. How Real is Real Estate? Redux...
...Huang and Hudson Wilson (2007) find that office is the best property sector at hedging inflation risk and
retail one of the worst....
If real estate is not that real, what drives real estate returns? We circle back here to the baseline models in urban economics – property market fundamentals matter, and movements in consumer or producer prices are just one of many factors affecting spatial equilibriums. Other macro factors like interest rates, economic growth, and other risk premiums matter.The micro level matters, too. Direct real estate returns comprise both income components and capital gains. Both matter, but cash components matter more in the short run due to the illiquid nature of direct real estate. A long-term lease that has inflation-indexed rents and is triple net (where all operating expenses such as taxes, insurance, utilities, and maintenance are paid by the
tenant) is a perfect income inflation hedge. The worst income inflation hedge is a long-term contract with a fixed rent where the landlord is responsible for all expenses.
So what is a real asset? The best one in this chapter turns out to be cash (T-bills), in terms of moving together with inflation. Cash is too often underestimated as an inflation hedge. But T-bill returns are lower than the expected returns of other asset classes. Carole should note that real bonds are definitely not that real and gold is badly over-rated as an inflation hedge. It is challenging to find assets that deliver steady real returns – but that is exactly why these assets have risk premiums in the long run. Factor theory says that these assets have long-run risk premiums because they do not pay off during bad times, when investors most desire cashflows. Times of high inflation are bad times. That most risky assets, including “real” assets, are not
perfect inflation hedges is why these assets have long-run risk premiums....
HT: Abnormal Returns?
*Here are some of the Prof's other SSRN papers:
CAPM Over the Long-Run: 1926-2001
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AFA 2004 San Diego Meetings
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