Property companies face
changes on both operational revenues and expenses when inflation rises, therefore it is necessary to have a
closer look at the way these variables interact, in order to understand the final effect on LRE companies.
According to EPRA's "Inflation and short-term impact on listed property companies" report, global inflation has increased significantly during the last couple of years, mainly due to supply disruptions coupled with recovering demand, as well as rising commodity and housing prices. The main central banks in Europe expect inflation to peak at some point this year and gradually return to prepandemic levels by late 2022/early 2023, once supply limitations and base effects have eased.
The current inflationary pressure is likely to be temporary and its short-term impact should represent a positive driver for the listed real estate industry in Europe.
Inflation plays a key role in influencing lease contracts, maintenance costs, development expenses and property valuations among others. Therefore, property companies see changes in both revenues and expenses when inflation rises. In the case of European listed real estate companies, there is evidence of a strong and positive correlation between corporate profits and inflation as well as shareholders’ returns and inflation.
Rental practices in Europe facilitate the integration of inflation dynamics into the companies’ revenues
and support rental growth. Property yields are currently stable and display a spread against
government bond yields above the historical average, therefore providing stability for future property
valuations.
