For investors worried about keeping up with the rising cost of...

For investors worried about keeping up with the rising cost of living, real estate is always an important asset class to hold in a portfolio, whether it be a home, holiday or investment property. BlackRock in a recent report showed that US and global real estate, as well as global infrastructure, beat stocks and bondswhen inflation is high. The asset management giant looked at average annual returns in different regimes of growth and inflation over the past 20 years, finding that outperformance was seen in low and high periods of growth. US real estate was the top performer when both growth and inflation are high.

Source: Blackrock

Steven Cornet of BlackRock said in an interview with Marketwatch on Thursday that both “private and public bets on real estate and infrastructure equities outperform in high inflation. These real assets tend to fare better partly because leases and revenue streams are directly or indirectly linked to inflation. Overtime, cash flows keep up with inflation. Inflation and economic growth are each considered high when above 2.5%. It’s hard to forecast inflation. I don’t envy the Fed.”

BlackRock expects inflation will rise over the medium term to above the Federal Reserve’s average target of m2%, and anticipates inflation of almost 3% in five years, which is “above current break-even rates, but well below 1970s levels of hyperinflation.” Mr Cornet noted that “we believe real, inflation-adjusted yields will remain negative. Should the 10-year Treasury yield stay below 2.5%, a lot of other asset classes still look attractive.”

“It’s just low yields everywhere. But yields from infrastructure and real-estate assets are higher, and against the backdrop of inflation, are a fairly attractive area for real assets.”

I am probably a little more cautious on property at present given the big run up in prices, but there are assets available that can still be bought attractively. In the last six months we launched to two motel syndicates which sold out quickly to investors, given the high running yield and that this asset class had been left behind the broader market to some extent. Property has a very important place in any investment portfolio in my view, and I have around half of our private funds invested in commercial and residential real estate.My biggest regret is that I didn’t diversify further and buy agricultural farmland ten years ago.)

If inflation does pick up – and I think it will – then property stands to do very well. The other point is that fixing and locking in ultra-low interest rates for a period can let inflation eat away at any mortgage.