Lesson 4 of 7 · 11 min
Real estate income, inflation and diversification
Most of commercial real estate's return comes from steady rent, which, together with low correlation to stocks and some inflation protection, makes property a diversifier, though listed REITs move more with equities and correlations jump in steep sell-offs.
In short
- More than half of commercial real estate return typically comes from income; income is more consistent across the cycle than appreciation.
- Longer leases, better-quality tenants and rent increases reduce the variability of returns.
- Real estate is like a convertible bond: steady cash flows plus upside, with low correlation to equity price moves.
- Inflation hedging works best with contractual rent step-ups or frequent re-pricing to market, and varies by place, segment and period.
- Infrequent appraisals make private real estate correlations look artificially low; equity investors discount future cash flows while appraisers lean on current conditions and recent trends.
- Equity REIT correlations with stock markets rise in steep downturns, but the consensus is that real estate still diversifies portfolios.
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