Inflation‐hedging properties of indirect real estate investments in Germany
| Pages | 218-240 |
| Date | 20 April 2012 |
| Published date | 20 April 2012 |
| DOI | https://doi.org/10.1108/14635781211223806 |
| Author | Daniel Obereiner,Björn‐Martin Kurzrock |
| Subject Matter | Property management & built environment |
Inflation-hedging properties
of indirect real estate investments
in Germany
Daniel Obereiner and Bjo
¨rn-Martin Kurzrock
University of Kaiserslautern, Kaiserslautern, Germany
Abstract
Purpose – This paper seeks to shed light on the question whether German real estate investment
vehicles provide an effective hedge against inflation. To do so it aims to investigate open-end real
estate funds, special funds and real estate stocks.
Design/methodology/approach – Traditional approaches as well as cointegration and causality
tests are applied to monthly and quarterly index data from 1992:04 to 2009:12 for the subject
investment vehicles.
Findings – There is strong evidence that real estate returns are almost independent from inflation in
the short run. None of the investigated investment vehicles provide a hedge against expected and
unexpected inflation at different lags. In contrast, cointegration tests show that real estate stocks,
open-end funds and special funds do provide a hedge against inflation in the long term. Likewise,
causality tests suggest that real estate performance is influenced by inflation in the long term.
Research limitations/implications – The study still could not investigate closed-end funds and
G-REITs. Yet, it does capture the most and comprehensive part of the indirect German real estate
investment market.
Practical implications – Inflation-hedging capabilities are of particular interest in periods of
economic instability. Especially institutional investors with large asset portfolios seek to adjust their
asset allocation to changing conditions.
Originality/value – To date, research papers on the subject of inflation-hedging capabilities of real
estate almost exclusively focus on REITs in the USA and in the UK. Research about the German real
estate market and alternative investment vehicles is rare – partly due to a lack of transparency over
the past – although international investors more and more adhere to the German real estate
investment market.
Keywords Real estate investment,Inflation, Inflation-hedging,Indirect real estate investment,
Investments,Hedging, Real estate, Performance,Cointegration, Germany
Paper type Research paper
1. Motivation and outline
The hedging-capabilities of different kinds of assets are of particular interest in periods
of economic instability. Especially institutional investors with large asset portfolios are
interested in reliable information about inflation-hedging properties of their
investment opportunities in order to adjust their asset allocation to changing
conditions.
Real estate is often perceived as a sound inflation hedge. Although there are many
different ways for investing in real estate – regarding investment vehicles, locations,
property types and many more – the asset class as a whole is considered a stable,
inflation-hedging kind of investment. However, empirical evidence suggests that the
hedging-power of real estate depends on a variety of factors and has shown that results
to some extent also relate to the applied research methods.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
JPIF
30,3
218
Journal of Property Investment
& Finance
Vol. 30 No. 3, 2012
pp. 218-240
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781211223806
The first papers dealing with inflation-hedging properties of real estate date back
until the 1960s or 1970s. Most of the studies that followed, especially early and
“traditional” ones, examine REITs and stocks in US markets. Until recently, research
about European real estate markets was basically confined to the UK. Despite of the
size of the German real estate market its inflation-hedging characteristics have only
been analyzed scarcely to date. Possible reasons for this could be the lack of
transparency and especially the absence of REITs up until 2007. The prevailing types
of institutional real estate investors or investment vehicles in Germany are open-end
funds (OEF) and closed-end funds as well as pension funds and insurance companies,
which makes it still more complicated to obtain reliable data.
This study goes beyond the rare empirical evidence for the inflation-hedging
characteristics of German indirect real estate investments by examining OEF, special
funds and real estate stocks (RES) in Germany over the period from April 1992 to
December 2009. To do so, a range of methods and approaches are applied. First, the
data are tested for stationarity using the Augmented-Dickey-Fuller-test (ADF) as a
prerequisite for applying the traditional Fama and Schwert method (1977). The widely
known Fama-Schwert (FS) approach distinguishes between expected, unexpected and
overall ex post inflation in an effort to measure the ability of an asset as a short-term
hedge against inflation. Given the long-term nature of most real estate investments,
however, it is particularly interesting to expand the view beyond short-term
hedging-mechanisms. In the next step, therefore, the Engle-Granger cointegration test
and a Johansen cointegration model account for the long-term relationship between
inflation and real estate returns that were disregarded in a number of early studies.
Finally, Engle-Granger causality tests are carried out to further check the robustness of
results. The aim is to advance the understanding of indirect real estate investment
returns with respect to short-term and long-term relationships with inflation related to
all major types of indirect real estate investment vehicles in Germany.
2. Literature review
Inflation-hedging effectiveness of real estate has been subject to empirical research
since the initial paper by Fama and Schwert (1977) who measure short-term
inflation-hedging capabilities against expected and unexpected inflation. Although
this model is criticized for its failure to distinguish between long-run equilibrium
adjustments and short-run dynamic movements (Tarbert, 1996), it has been used –
sometimes modified – in many frameworks. In more recent papers it is accompanied
by suitable methods like cointegration techniques to capture long-term relationships.
The analysis of inflation-hedging properties of real estate has evolved for more than
30 years now. While the first studies focused on the USA and UK and primarily
examined the inflation-hedging abilities of REITs and stocks subsequent research also
sheds light on other countries, different investment vehicles and different property
types. Therefore, the following literature review differentiates between results for
direct real estate investments and indirect investments such as REITs, stocks and
mutual funds.
Fama and Schwert (1977) show that US residential real estate provides a complete
hedge against both components of inflation when semiannual data over the period from
1953 to 1971 are used. By employing monthly and quarterly data, residential real estate
turns out as a hedge against expected inflation but not against unexpected inflation.
Inflation-hedging
properties
219
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