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Wealth Advisors look to Real Estate Strategies to Help Hedge Inflation

With October’s inflation number coming in at 6.2%¹, this adds to the growing fears of longer-term core inflationary pressures. Investors have begun to look at inflation hedges such as gold and even crypto assets. Volatility has crept back into the markets as allocators are expecting a quicker than previously anticipated Fed reaction to taper the inflationary pressures. While crypto might provide inflation cover, less volatile strategies such as real estate remain compelling, even as valuations remain stretched, and it can provide needed income, unlike gold. While transitory inflation has been the key word for most of the year, as we approach the holiday season, we believe the increased supply chain bottlenecks and hot labor market will likely extend the time frame for outsized inflation.

Consequently, interest in alternative strategies remains strong as valuation pressures on traditional assets have continued to keep yields low. Hedge fund interest has picked up on PPB’s platform as wealth advisors look to reduce beta and hedge inflation in their clients’ portfolios through both floating-rate debt and real estate strategies.

Real estate has earned its reputation as a good inflation hedge, especially in this environment of limited supply and rising rents. Investor demand did wane at the beginning of the year for most strategies as allocators looked to digest the impact of the pandemic and what it would mean to office, hospitality, and retail moving forward. For that reason, the fundraising cycle has been extended and managers have taken longer to reach final closes.

As the economy has reopened, hospitality has stabilized and now new funds across the entire real estate sector have come back into the market. Accordingly, specialist managers should have an advantage moving forward as investors have different opinions on what the world will look like in the various sub-sectors of real estate.  We believe they may be more inclined to allocate capital to targeted strategies as opposed to more broadly focused funds. For that reason, with the number of funds in the market now, allocators will have plenty of options to implement their investment opinions.

Within real estate, value-added was the dominant strategy in terms of both the number of funds closed and the amount of assets raised within Q3³.  Appetite for distressed deals remains low as investors are focused on higher-quality assets.

Multifamily real estate remains a popular inflation hedge, as unit turnover allows for frequent rent increases. With supply pressures continuing from two factors – the bottlenecked supply chain and the competition for labor and materials, the workforce housing segment can offer better value and lower rent risk compared to core real estate strategies, especially in an environment of escalating pricing pressures and lower cap rates. Valuations are definitely a concern, but areas such as multifamily have the ability to move rents to keep up with inflationary pressures.

Suburban garden-style properties are particularly attractive in a post-pandemic environment as they are not as encumbered by the less predictable retail space that can occupy part of Class A properties.

With inflationary pressures continuing to mount, real estate has historically been a welcome hedge for investors. The pandemic has extended the fundraising cycle for a number of offerings, and new entrants have come into an already crowded market.  In such an environment, smaller funds would seem to have an advantage, especially if managed by well-established, experienced teams that have a known sourcing network that is less dependent on auctions or brokers.

For more information on PPB’s alternative fund platform, please contact Frank Burke, CFA, CAIA, Chief Investment Officer, PPB Capital Partners, 484.278.4017 Ext. 108 or at fab@ppbadvisors.com.

Download: PPB – November 2021 Market Blog

Important Footnotes and Disclosures

1. Source: https://finance.yahoo.com/news/us-consumer-prices-soared-6-133914207.html
2. Source: Preqin Pro
3. Source: Preqin Pro