Eurozone’s inflation index rose to 8.9% in July, a record high since 1999, due to the ongoing energy crisis, according to the latest Eurostat reports. If energy and fuel are singled out, structural inflation reached 5.1% (the ECB’s target was 2%). In our country, it recorded a record in the same month with a double-digit rate of 11.3% and continues to follow. Across the Atlantic, however, the US saw a modest decline to 8.5% in July with the announcement of the Federal Reserve from 9.1% the previous month. A mild immediate retreat in July failed to prevent a tightening of monetary policy, that is, an easing of interest rate hikes. In addition to inflation, the problem also affects one of the main pillars of the structure of GDP and economic growth – the real estate market.

But how does inflation affect commercial real estate prices?

The commercial real estate markets entered a downward spiral first in the US and then, as usual, with a necessary time lag, in Europe due to the risk aversion of buyers during this period. Perhaps in the coming quarters, this situation in the international and European markets will be reflected more strongly, as companies are revising all development plans due to rising real estate operating costs. On the other hand, the continued rise in interest rates raises the cost of borrowing, further reducing demand.

In particular, office buildings also have to contend with a changing work model (remote work, here to stay) as well as pressure from their users for greener buildings, while retail and food service facilities face an increase in energy operating costs.

Theoretically, however, for commercial property owners, investments already made can offset inflation to the extent that they can index it into rent.

Wishing to add a more positive tone to the whole discussion, we can say that, historically, property returns in major European countries have been higher than inflation over various holding periods, with a longer holding period (10 years) providing the most protection against inflation.

Commercial real estate has proven to be the most effective hedge against inflation. In fact, on average, all property incomes in major European countries outperformed inflation between 2000 and 2021 for 19 out of 22 years by a margin of about 7.5% (source C&W). Over a decade of ownership, excellence is a given.

It can also be argued that the result above would have been somewhat similar, even without taking into account the increase in their value due to lower yields, although the latter factor played an important role until the pre-Covid period.

Commercial real estate has proven to be the most effective hedge against inflation.

Holding periods when income has exceeded inflation do not differ much, even if a distinction is made between medium and prime commercial assets, but in general, longer holding periods of prime commercial assets provide better protection against inflation. This can be explained by the fact that historically very good properties have proportionately lower returns and at the same time can more easily incorporate higher rents, thus a higher return on investment over time.

In terms of the type of commercial property, historically office and warehouse space has proven to be the best hedge, followed by retail property.

However, a distinction must be made here between the type of inflation.

If inflation is driven by strong GDP growth, it can support value through higher rents, higher occupancy, and expectations of higher incomes in the future.

* Mr. Antonis Zairis is Deputy Vice President of SELPE, Assoc. professor of business administration at the Univ. Neapolis in Cyprus, member of the Association of American Economists (AEA) and the World Economic Forum (WEF).

** Mr. Thanos Efthymiopoulos is the Regional Representative for Greece and is responsible for managing the investments and assets of Sonae Sierra in South Eastern Europe.