Allianz Real Estate research: 40-year data analysis shows real estate offers a hedge against high inflation

The firm analyzed office sector yields in New York, London, Paris, Frankfurt and Sydney and found rents have grown in line with inflation and real rents have been relatively stable within the context of real estate cycles. Indeed, real estate yields, given they are real yields, tend to be unaffected by rising inflation or inflation expectations.

Dr Megan Walters, Global Head of Research, Allianz Real Estate, said: “CPI inflation climbed to 7.5% in the U.S. and to 5.1% in the eurozone in January 2022 – among the highest readings for decades. But even with record inflation levels and uncertainty, our analysis shows real estate can provide long-run protection for investment portfolios.

“Real government bond yields are a key benchmark for real estate yields and the spread between the two is a risk premium for owning property. Historically, the long-term average for this premium was in the order of 340 basis points for our five markets. At year-end 2021, however, the spread was 515 bps, providing a strong and attractive cushion against rising real bond yields.”

The study by Allianz Real Estate argues that, with real estate able to offer a strong protection against inflation, investors should consider five sectors for globally diversified core portfolios: prime offices in global talent pool cities; U.S. multifamily; Europe logistics; Japan multifamily; and life sciences. 

For Europe logistics, the pandemic marked a tipping point in European e-commerce adoption. Compared to 10.6% at the start of the pandemic, the online share in retail sales in Europe is expected to have reached 14.3% by year-end 2021, though this is still behind the U.S. (c.20%) and South Korea (>35%).

In terms of the office sector, Allianz Real Estate’s office portfolio covers c. 225 assets in 47 cities. Such a large portfolio allows the firm to measure a range of metrics including location, asset quality, ESG and tenant quality. Its research shows that city center assets near restaurants and amenities, with strong ESG, smart and user-centric credentials and good public transport will continue to be in high demand. 

“This is reflected in valuation yields compressing at a rate greater than global average office yields during the pandemic,” added Dr Megan Walters, Global Head of Research, Allianz Real Estate. “Looking forward, prime office assets will provide resilient and inflation-protected income growth, with Allianz Real Estate forecasting long-term average rental growth of 3%+ pa for top office markets.”

“Overall, 2022 has started with elevated inflation in many countries. In this environment, we believe our five real estate sectors are among the top choices for diversified portfolios. Their attractive investment proposition is based on inflation-linked income streams, through lease indexation or inflationary market rents in the long run, and a sizeable yield spread over real risk-free rates.”

About Allianz Real Estate and PIMCO

Allianz Real Estate is a PIMCO Company, comprising Allianz Real Estate GmbH and Allianz Real Estate of America and their subsidiaries and affiliates.  It is one of the world’s largest real estate investment managers, developing and executing tailored portfolio and investment strategies globally on behalf of a range of global liability driven investors, creating long-term value for clients through direct as well as indirect investments and real estate financing. The operational management of investments and assets is performed out of 17 offices in key gateway cities across 4 regions (West Europe, North & Central Europe, USA and Asia Pacific). For more information, please visit:  PIMCO is one of the world’s premier fixed income investment managers. With its launch in 1971 in Newport Beach, California, PIMCO introduced investors to a total return approach to fixed income investing. In the nearly 50 years since, the firm continued to bring innovation and expertise to our partnership with clients seeking the best investment solutions. PIMCO has offices around the world and 3,000+ professionals committed to delivering superior investment returns, solutions and service to its clients. PIMCO is owned by Allianz SE, a leading global diversified financial services provider.

Source: Allianz Real Estate, data as at 31st December 2021. 

These assessments are, as always, subject to the disclaimer provided below.

The Allianz Group is one of the world's leading insurers and asset managers with around 125 million* private and corporate customers in nearly 70 countries. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing around 737 billion euros** on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage about 1.7 trillion euros** of third-party assets. Thanks to our systematic integration of ecological and social criteria in our business processes and investment decisions, we are among the leaders in the insurance industry in the Dow Jones Sustainability Index. In 2023, over 157,000 employees achieved total business volume of 161.7 billion euros and an operating profit of 14.7 billion euros for the group.
* Including non-consolidated entities with Allianz customers.
** As of December 31, 2023.

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Phillip Lee
Allianz Real Estate
As with all content published on this site, these statements are subject to our cautionary note regarding forward-looking statements:

Further information

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