Real estate's role as an inflation hedge in a post-COVID world - PrinREI Real Estate as an inflation hedge
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For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale
Investor Use Only in Permitted Jurisdictions as defined by local laws and regulations.
Principal Real Estate
Real estate’s role as an inflation
hedge in a post-COVID world
Executive summary
Property types with shorter-duration leases appear to
The Federal Reserve's recent Jackson Hole
offer the most inflation benefits
Symposium has renewed attention on inflation in
light of the unprecedented global fiscal and monetary In a constructive growth scenario accompanied by
policy response to the COVID-19 pandemic an acceleration in inflation, we find that there could
be strong reasons to own multifamily, lodging, and
If inflation exceeds capital market expectations, risk
selective offices. Industrial properties with tenants
assets could underperform. As such, investors should
that benefit from strong structural tailwinds could
consider assets which may offer some protection
also provide inflation protection opportunities
against a potential increase in inflation
Under a sub-par growth environment with rising
In examining data for private commercial real estate
inflation (or a mild stagflation), we believe protection
in the U.S and the UK, we find that it has some
may be found in owning multifamily, non-major
beneficial ability in protecting investors from inflation
markets, and grocery anchored “essential” retail
compared to other asset classes
Why is the debate on inflation spread of COVID-19, governments and central banks
have injected trillions of dollars in stimulus to prevent
attracting more attention? a global economic calamity. Historically, periods of
The Federal Reserve’s recently concluded annual significant fiscal outlays and accommodative monetary
symposium at Jackson Hole generated headlines for its policy, or “printing money”, have been followed by
formal adoption of “a flexible form of average inflation accelerating inflation due to a substantial increase in the
targeting” confirming what investors had long been velocity of money. Such an environment is problematic,
expecting – a more nuanced and softer approach, particularly if it is not accurately priced in by capital
indicating that inflation will be allowed to run “hot” in markets, which sets the stage for increased volatility
the aftermath of persistent inflation shortfalls. While the and, potentially, a re-pricing of risk assets. It may also
Fed’s shift in stance brought inflation into the limelight, jeopardize real returns. Though we have yet to see
in truth markets and investors have been debating this evidence of an acceleration in the velocity of money,
for months in the background of an unprecedented the money supply (as measured by M2) has increased
global fiscal and monetary policy response to an equally by nearly 10% in Europe and more than 20% in the U.S.
unprecedented global pandemic. In response to the rapid since the recession started in February (exhibit 1).
Exhibit 1: Expansion in money supply, post COVID-19 in select countries
M2 money supply, Annual % change
25 U.S. Europe UK
20
15
10
5
0
-5
1959 1965 1971 1977 1983 1989 1995 2001 2007 2013 2019
Source: FRED, ECB, BoE, Federal Reserve, August 2020
1
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For context, exhibit 2 below shows that in the U.S., helped spark a rally for risk assets. Put another way, as
growth in the money supply since the end of World War the money supply increased, spending remained in line
II (WWII) has ranged between roughly 4% in periods of with the expansion of goods and services, meaning that
stable and sustained economic growth to nearly 10% the velocity of money declined sharply, resulting in no
during periods of economic turmoil such as the 1970s significant or sustained increase in inflation.
when inflation, economic growth, and central bank policy
were seemingly out of alignment. It should be noted, Fast forward to 2019, the Fed and ECB had continued to
however, that the expansion of the money supply in support both public markets and underlying economic
most cases can be organic and in line with growth in the growth by a sustained but more moderate balance sheet
economy. expansion. At the beginning of 2020, the Fed’s balance
sheet totaled roughly $4.2 trillion. By comparison, the
Exhibit 2: Inflation, money supply and economic ECB’s balance sheet was at approximately €4.7 trillion at
growth in the United States the start of 2020. Since the beginning of the COVID-19
Avg. Real crisis, the Fed’s balance sheet has ballooned to nearly
Avg. CPI Avg. M2 GDP Growth $7 trillion with the ECB close behind at €6.4 trillion. So
1950-1959 2.2% 4.1% what is different this time as the world emerges from the
COVID-19 recession?
1960-1969 2.6% 7.1% 4.2%
1970-1979 7.5% 9.7% 3.3% It appears that a perfect storm of several factors is
driving the current debate on inflation. For starters,
1980-1989 5.0% 7.9% 3.2%
in addition to a massive expansion of central banking
1990-1999 2.9% 3.9% 3.3% balance sheets, unprecedented fiscal stimulus (worth
approximately $4 trillion in spending in Europe and the
2000-2009 2.5% 6.1% 1.8%
U.S. with more in the pipeline) has been implemented
2010-2019 1.8% 6.2% 2.1% to date. These programs included loans and grants to
Source: Federal Reserve, BLS, BEA, Principal Real Estate Investors, businesses, direct household payments, tax deferrals and
August 2020
extensions, and supplemental unemployment benefits.
So, fiscal policy, if sustained (appears likely regardless
of election outcome) may be a key catalyst this time as
“Printing money” and investor it supports demand (consumption) despite high levels
concern on the potential for high of unemployment (idled resources). Further, the impact
and sustained inflation of an explicit Fed pivot at Jackson Hole to let inflation
run higher than target and consequently a weaker U.S.
Central bank balance sheet expansion is not new and in dollar could put upward pressure on consumer prices,
fact, has been part of the new experiment in quantitative particularly for imported goods and services. Certain
easing (QE) since the global financial crisis (GFC). The segments of capital markets already appear to be pricing
post-GFC world seemingly ushered in a new era of for higher inflation. TIPS have been strong performers
central banking where policy-making was not merely and break-even rates/inflation expectations have been
limited to interest rates, but also asset purchases, QE, trending much higher than spot inflation. Therefore,
and yield curve manipulation. In the wake of the GFC, regardless of the actual outcome, sentiment appears to
the U.S. Federal Reserve expanded its balance sheet be shifting and could start to pressure long yields.
to the then unprecedented level of $2 trillion between
the start of the recession in 2007 and June of 2009— Shorter-term, there has been some evidence of supply
an increase of 125%. Over the same period, the ECB’s chain disruptions that have caused food prices to
balance sheet expanded by approximately €1 trillion or increase sharply through the first half of the year, but
nearly 100%. Despite the concerns of inflation hawks, even this trend is proving transitory. Commodity prices,
acceleration in prices never truly materialized due to however, have remained weak. The energy sector, in
the lack of broader consumer demand and the fact that particular, has experienced lower levels of demand for
much of the additional money in the economy was never fuel related to both ground and air travel as shutdowns
put to a productive use—rather it largely sat in the form have limited commuting and vacation travel. In the short-
of bank reserves where it lowered interest rates and term, movements in inflation are likely to be governed by
2
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a recovery in energy prices, efficiency in the supply chain, approach was largely successful, but along with several
and both consumer confidence and demand—which exacerbating factors and, perhaps, policy complacence,
will remain challenged until we see a normalization of gave way to a transitionary period toward the end of
economic activity. Thus, in the short-term, disinflationary the 1960s. During this period, economic growth began
pressures may have the upper hand, given the still fragile to overheat and policy-makers acted too slowly. At the
recovery from the steepest recession in history. same time, the U.S. economy encountered oil and food
price shocks and overly aggressive fiscal policies during
As far as we are concerned, the primary longer-term the Vietnam War that stretched economic capacity. The
issue is the potential lack of preparedness in risk assets Bretton-Woods agreement was dissolved in 1971, the
for the potential impact of higher interest rates and U.S. devalued the dollar, and most countries adopted
inflation. The secondary effect would be slower earnings a floating exchange rate mechanism. This transition
growth and lower corporate profits as a result of reduced period is also referred to as the ‘great inflation,’ which
aggregate demand. lasted into the early 1980s and ended with the adoption
of a more stringent monetary oversight focused on
Inflation scenarios: eliminating accelerating inflation. Europe started to bear
the consequences of the floating rate mechanism, and by
An extension of the new normal, 1973 most of the world’s major currencies were floating
or back to the future? against one another.
To understand the potential future path of inflation, The twin oil shocks of the 1970s were exacerbated by
it is important to contextualize it within the broader floating rate exchanges resulting in extraordinary levels
economic environment. Debate around inflation has of inflation (exhibit 3). It took a sharp increase in interest
evolved considerably since WWII as its understanding rates by Federal Reserve chair Paul Volcker in the 1980s
has improved along with a vast expansion in central that led to what has come to be known as a period of
banking tools. Exhibit 3 highlights some broad “stages” “great moderation” in Europe and the U.S., characterized
of growth and evolution of post-war economic policy- by generally stable growth, declining interest rates
making to try and provide some context to the and declining inflation—even during periods of full-
current debate, as well as throw light on the potential employment. The post-GFC era, was the first large scale
path forward. expansion of the Fed and ECB’s balance sheet, bending
some of the traditional rules of monetary theory; most
In the U.S., the period immediately following WWII, saw
notable is large increases in the money supply tend to
the Fed establish its independence with a mandate to
generate unhealthy increases in inflation. The post-GFC
promote both price and economic stability. It also led to
era of policy making is sometimes referred to as that of
the Bretton-Woods agreement which was a negotiated
"modern monetary theory."
system of monetary arrangements between developed
nations. During the early years of the post-war era, this
Exhibit 3: Inflation trends have been structural since WWII
YOY % change
U.S. Europe
16
Great inflation
14
12 Great moderation
Post-war era
10
8 Post-GFC
6
4
Post-COVID
2
0
-2
1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
Source: U.S. Census Bureau; World Bank; Principal Real Estate Investors, 2020
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As we have seen, the post-GFC period has been largely If indeed the velocity of money does increase and lead to
devoid of significant inflationary pressure despite a higher than anticipated inflationary outcome, investors
attempts to stimulate growth and a more stable pricing. need to plan for the accompanying economic scenarios
Demand for the most part has been stable if somewhat as well as implications for risk assets. We identify two
more muted than during prior recoveries—even those potential scenarios where inflation is more meaningful
that occurred during the “great moderation”. Increases in over the medium-term: (a) return to “normalcy” where
the Fed’s balance sheet—and by translation the money economic growth results in modest and sustained
supply—had little impact on inflation due to a sharp inflationary pressures aka “good” growth and, (b) subpar
decline in the velocity of money. growth accompanied by higher inflation or “bad” growth.
We identify the broad characteristics of these two scenarios below.
Scenario 1: Scenario 2:
A return to “normalcy” where trend economic growth— Subpar growth accompanied by increased inflationary
of between 1.5% and 1.8%—results in modest but pressures – potential stagflation. Underpinning that
sustained inflationary pressures. Underpinning that scenario would be:
scenario would be: • Poor containment of COVID-19 leading to limitations
• Material progress on containing COVID-19 by 4Q on economic activity through the end of 2020
2020 and the emergence of widely distributable • Elevated unemployment levels/low productivity—a
medical solutions from early 2021 much slower return to pre-crisis levels
• Accelerating employment and a return to near-full • Continued pressure and weakness of the USD
labor market sooner than currently forecast as a result of deteriorating fiscal situation and
• Sustained moderate growth in the labor force underperformance of the U.S. economy relative to
• Weaker but stable USD and gradual strengthening Europe
of the Euro and Pound Sterling • Additional supply chain disruptions as a result of
• Ongoing and relatively orderly unwinding of Britain rolling closures along the supply chain, particularly
from the European Union for food and necessities (short-term)
• Stabilization of commodity and energy prices • Consumption driven by a narrow group of the
population exacerbating existing income inequalities
Real estate implications: All else being equal, it should
be an environment of improving vacancy and increasing Real estate implications: Challenging outlook for
occupancy. We would expect early evidence of rent vacancy and occupancy and potential retracement of
gains in lodging, multifamily, industrial warehouse some values. Slack demand is likely to pressure rents
properties, and office with exposure to industries and we would favor property types that offer income
with lower elasticity of demand – property types that protection capabilities. As such, we expect select
would benefit from the cyclical upturn in growth and multifamily (ex-luxury), and “essential” retail serving non-
accompanying inflation. discretionary needs to keep in step with inflation.
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Implication for risk assets and from 1987. We focus our analysis on the private quadrant
of real estate since it remains by far the biggest in terms
commercial real estate of size and investor interest.
Were inflation to emerge more materially in the coming
The clearest examination of the relationship between
years, investors need to ask themselves if their asset
two variables is to understand the strength of the
allocation mix is well-prepared. Do they have some
correlation. The higher the level of correlation between
potential assets that could provide real returns? Our
the two, the closer the relationship. A correlation
examination of private commercial real estate in the
coefficient of 1.0 would suggest that an asset class
U.S. and the UK suggests it is an asset class that can
moves in lock step with inflation while a correlation of
provide a degree of inflation protection benefit through
-1.0 indicates an inverse relationship. All things being
the term and structure of leases along with the ability
equal, a higher correlation coefficient would imply
to capture and pass through higher replacement costs.3
superior inflation protection capabilities. Further, we also
Real estate leases directly (indexation) or indirectly
compared the correlation relationship between other
(term, leases for newly constructed buildings, percentage
asset classes including public equities, bonds and public
rents) have the potential to track inflation and therefore
real estate to determine the relative inflation protection
can offer some hedging benefits to investors. With an
that commercial real estate has provided over the time
increase in material and labor cost, replacement costs
period of analysis.
may also increase providing some potential capital gain
protection too. For the U.S., data shows that the quarterly correlation
between private real estate total returns and inflation
Since rent and capital growth are the two major
is 0.41 on an annual basis. For comparison, over the
components of total return, we can examine the
same period, public real estate total returns (REITs)
empirical evidence on the relationship between
have exhibited a 0.43 correlation to inflation. In
commercial real estate performance and inflation.
contrast, broad equities (-0.090) and bonds (-0.18)
Unfortunately, a lack of historical data precludes analysis
have not offered protection against inflation. In the UK,
for much of “great inflation” period between the late
correlation of 0.14 for real estate is close to that of broad
1960s through the early 1980s. Instead, the earliest data
equities (0.15) but lower than that of bonds (0.28) which
we have is in the U.S from 1978, the year the NCREIF
suggests a more modest degree of inflation protection
National Property Index (NPI) was formally established
for UK real estate investors.4
and began data collection. In the UK, our data starts
Exhibit 4: Real estate investment performance and measurement with inflation
U.S. Commercial Real Estate UK Commercial Real Estate
Total return 0.41 Total return 0.14
Income return 0.36 Income return -0.31
Appreciation return 0.34 Appreciation return 0.17
U.S. Barclays Bond Aggregate UK Barclays Bond Aggregate
Total return -0.09 Total return 0.28
S&P 500 FTSE 100
Total return -0.18 Total return 0.15
Source: MSCI-IPD, NCREIF-NPI, Bloomberg, Principal Real Estate Investors, August 2020
UK inflation is measured by Retail Price Index (RPI), U.S. inflation is measured by CPI.
U.S. CRE since 1979, UK CRE since 1988, U.S. Barclays Aggregate since 1977, UK Barclays Aggregate since 2000, S&P 500 since 1967, and
FTSE 100 since 1983.
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Property type selection makes
a difference
However, we need to dig deeper because as investors Exhibit 5: Property type investment performance
we know leases vary by property type, and therefore and measurement with inflation
in theory, properties that have short duration leases
All property United States United Kingdom*
should provide slightly better inflation protection
since landlords can adjust rents in response to Total return 0.41 0.14
changing inflation conditions and expectations. Income return 0.36 -0.31
We undertook additional correlation analysis at
Appreciation return 0.34 0.17
the property level and indeed find support for this
hypothesis. In the U.S., apartment total returns have Apartment
the highest correlation (0.51) followed by office total Total return 0.51 0.38
returns at 0.45. Retail total return has the lowest
Income return 0.38 -0.24
positive correlation reflecting the longer leases, as
well as the likely diminishing of landlord pricing power Appreciation return 0.45 0.40
given the secular headwinds to the property type (and
Office
percentage rents kick in at very elevated levels since it
Total return 0.45 0.14
has not been a “tactical” consideration in pricing lease
contracts—out of the money for the most part). The Income return 0.23 -0.29
UK also exhibits the most robust correlations between Appreciation return 0.41 0.18
inflation and the multifamily sector, followed by office
and industrial. In both countries, the strong growth Industrial
in white collar jobs over the past three decades and Total return 0.31 0.21
the increased profit margins of corporates may Income return 0.29 -0.08
have a positive causal relationship with the ability
Appreciation return 0.25 0.22
of landlords to price rents in excess of inflation.
Conversely, in the retail sector where a substantial Retail
number of tenants have faced diminishing margins as Total return 0.19 0.10
e-commerce has soared, landlord rental power has
Income return 0.36 -0.45
significantly diminished which could also explain the
low relationship with inflation. Appreciation return 0.12 0.13
Source: NCREIF-NPI, MSCI -IPD, Moody's Analytics, UK Office for
Differences in lease duration and structures no doubt National Statistics, August 2020
lead to the variances in correlation coefficients to Correlations run using an annual percent change at a quarterly
inflation. Lease durations vary by property type and frequency. United States analysis since 1979 and UK since 1988.
*UK correlations use the Retail Price Index (RPI) and multifamily
all else being equal, shorter-term leases can match
correlations are since 2001
inflation more quickly than longer-term leases if
there are no material supply/demand imbalances
in a market. While shorter-term leases should allow
landlords to capture inflation more quickly, longer-
term leases may include step-ups at specific points
but may lag unanticipated inflation.
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Model portfolio construction and 500 exceeded inflation 85% over a random seven-year
period. Corporate bonds delivered the best inflation
inflation simulation protection due to their explicit spread over interest rates.
In order to further test the relationship between
The results were similar in trend in the UK where our
commercial real estate and inflation, we created a
simulation showed that over any random seven-year
hypothetical portfolio consisting of stocks, bonds, REITs,
holding period, an index of real estate returns exceeded
and private real estate for the two markets we have the
inflation nearly 84% of the time. The outperformance
deepest set of data—the U.S. and UK. We measured
over inflation was approximately 629 basis points.
performance over a seven-year period assuming that to
Interestingly, private real estate outperformed other
be a reasonable proxy for a typical hold for a real estate
asset classes by a greater degree in the UK simulations
asset. The portfolio simulation was based on a selection
with the exception of corporate bonds for reasons
of 5,000 random starting points for the period 1978-
stated above.
2020 for the U.S. and 1987-2020 for the UK.5
While the results of this exercise do support the thesis
Our simulation found that in the case of the U.S., over
that commercial real estate has some visible inflation
any random seven-year holding period, an index of real
protection benefits, it needs to be pointed out that since
estate returns exceeded inflation nearly 91% of the
the 1980s, inflation has been trending down steadily.
time. For the portfolios that outperformed, the excess
On the flip side, it can also be argued that unparalleled
over inflation was approximately 667 basis points. Put
monetary measures including QE since 2009 has
it another way, real estate underperformed inflation far
resulted in extremely strong performance by long-term
fewer times and by materially lower amounts than the
treasuries and corporate bonds. Thus, risk assets all
times it has outperformed. A similar analysis shows that
appear to have benefitted by the fall in interest rates in
REITs have beaten inflation by 84% during a seven-year
the post-GFC period.
period. Conversely, U.S. equities, as proxied by the S&P
Exhibit 6: Asset class investment performance vs. inflation
% of 5,000 portfolios Average bps of % of 5,000 portfolios Average bps of
that beat inflation outperformance that don't beat inflation underperformance
6A: 7-year holding periods, 5,000 random samples; data drawn from 1978 Q1 : 2020 Q1 performance history
NCREIF-NPI total return 90.82% 667 9.18% -114
FTSE All U.S. REITs 84.18% 1078 15.82% -457
Short-term Treasury total return* 70.04% 276 29.96% -99
Long-term Treasury total return* 99.88% 318 0.12% -14
S&P 500 total retun 85.00% 1200 15.00% -421
Corporate bonds* 95.86% 491 4.14% -149
Source: NCREIF, Bloomberg, Principal Real Estate, August 2020
6B: 7-year holding periods, 5,000 random samples; data drawn from January 1998 : June 2020 performance history
MSCI UK CRE (Pound) 84.02% 629 15.98% -200
FTSE NAREIT UK Index 56.02% 846 43.98% -865
Short-term Treasury total return* 40.48% 149 59.52% -200
Long-term Treasury total return* 59.34% 136 40.66% -71
FTSE 100 (TR, Pound) 46.86% 449 53.14% -446
S&P UK Corporates (Pound)* 90.68% 373 9.32% -112
Source: NCREIF, Bloomberg, Principal Real Estate, August 2020
* As of June 2020 Weighted Average Maturity for the U.S. Corporate Bond Index was 8.2 years, while the S&P UK Corporates was 12.63.
Short-term Treasury total return: Long-term Treasury total return: Corporate Bonds:
6A: 1-year U.S. Treasury Bills 6A: 10-year U.S. Treasury Bond 6A: Bloomberg/Barclays U.S. Aggregate (TR, Unhedged)
6B: 1-year UK Gilt (Pound) 6B: 10-year UK Gilt (Pound) 6B: S&P UK Corporates (Total Return, Pound Denominated)
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Key conclusions
The debate around the re-emergence of inflation is inflation. A test of hypothetical model portfolios via
increasing with investors observing the large policy simulation also demonstrated strong support for the
support programs in place to support growth and the ability of private real estate to outperform inflation.
coincident increase in money supply. The Fed's statement
at Jackson Hole reaffirms its support for flexible inflation However, the future path of inflation needs to be
targeting. While we don’t know for sure if the increase viewed in the broader context of the economy since
in money supply will lead to a higher velocity of money both are closely interrelated. Under a “good” growth
and push inflation higher, we do observe a growing list of scenario of positive inflation, we would expect lodging,
potential catalysts that bear watching. For most investors, multifamily, and office with exposure to industries with
an approach of “waiting to see the data” may not be lower elasticity of demand to match and perhaps exceed
enough: instead, it would be beneficial to proactively inflation. Industrial properties with tenants benefiting
analyze and add those assets that may provide some from secular tailwinds are also likely to capture rents
protection were stronger than anticipated inflation to in excess of inflation. Under a “bad” growth scenario
emerge. We examine private real estate as one such asset wherein inflation rises but is not accompanied by
class and have found that while there are data challenges, underlying growth, slack demand is likely to pressure
there is empirical evidence that demonstrates a positive rents downwards and we would favor property types
relationship between inflation and performance. Further, that offer income protection capabilities. As such, we
there is greater evidence that inflation protection expect select multifamily (ex-luxury), and “essential” retail
improves with properties that have shorter duration serving non-discretionary needs to keep in step with
leases since landlords can turn leases faster and capture inflation and would bring benefit to a portfolio.
Authors:
Indraneel Karlekar, Ph.D. Arthur Jones Madhan Rengarajan
Senior Managing Director, Senior Director, Senior Director,
Global Head, Research & Strategy Research & Strategy Research & Strategy
Special acknowledgment to Jonathan Frank, Manager, Research & Strategy
and Jonathan Ling, Research Analyst, Research & Strategy, for their
modeling and data analysis used in this paper.
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1
Milton Friedman wrote, “Inflation is always and everywhere a monetary Subject to any contrary provisions of applicable law, Principal Global Investors and
phenomenon.” According to the widely accepted monetarist view, inflation occurs its affiliates, and their officers, directors, employees, agents, disclaim any express or
because there is too much money available to buy the same amount of goods implied warranty of reliability or accuracy and any responsibility arising in any way
and services produced in the economy. This view can also be represented by the (including by reason of negligence) for errors or omissions in this document or in the
so-called “quantity theory of money,” which relates the general price level, the total information or data provided in this document.
goods and services produced in a given period, the total money supply and the All figures shown in this document are in U.S. dollars unless otherwise noted.
speed (velocity) at which money circulates in the economy. Investing involves risk, including possible loss of principal.
2
“M2 includes a broader set of financial assets held principally by households. M2 This material may contain ‘forward-looking’ information that is not purely historical
consists of M1 plus: (1) savings deposits (which include money market deposit in nature and may include, among other things, projections and forecasts. There is
accounts, or MMDAs); (2) small-denomination time deposits (time deposits in no guarantee that any forecasts made will come to pass. Reliance upon information
amounts of less than $100,000); and (3) balances in retail money market mutual in this material is at the sole discretion of the reader.
funds (MMMFs). Seasonally-adjusted M2 is computed by summing savings
This material is not intended for distribution to or use by any person or entity in any
deposits, small-denomination time deposits, and retail MMMFs, each seasonally
jurisdiction or country where such distribution or use would be contrary to local law
adjusted separately, and adding this result to seasonally adjusted M1.”, Federal
or regulation
Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M2, August 17, 2020.
This document is intent for use in:
3
Data limitations restricted our analysis to the U.S. and UK which have the longest
and deepest time series on private real estate investment performance. • The United States by Principal Global Investors, LLC, which is regulated by the
U.S. Securities and Exchange Commission.
4
UK data series is shorter than the U.S. Further, high street retail, which is a good
• Germany, Austria and the Netherlands by Principal Global Investors (EU)
part of the index, has been facing a structural decline in landlord pricing power
Limited, Sobo Works, Windmill Lane, Dublin D02 K156, Ireland. Principal Global
which has translated into declining rents.
Investors (EU) Limited is regulated by the Central Bank of Ireland.
5
Results were generated through a monte-carlo simulation over every 7 year
• For all other European countries, this document is issued by Principal Global
historical holding period from the data mentioned in 6A and 6B (6A: Quarterly
Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered
Data from 1978Q1-2020Q1, 6B: Monthly Data from 1998M1- 2020M6). The two
in England, No. 03819986, which is authorized and regulated by the Financial
simulations were constructed by fitting a Gaussian Copula on the empirical kernel
Conduct Authority(“FCA”).
densities of each asset class, on every 7 year holding periods’ covariance matrix.
Thus for 6A, 142 models were constructed and 36 returns were then randomly • In Europe, this document is directed exclusively at Professional Clients and
sampled from each individual model; while for 6B 186 models were fit and 27 Eligible Counterparties and should not be relied upon by Retail Clients (all as
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parametric density which may not exist for the underlying assets. PGIE or PGI EU, PGIE or PGI EU may delegate management authority to affiliates
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*Indices used in this paper: NCREIF-NPI total return represents U.S. Private client may not benefit from all protections offered by the rules and regulations of
Commercial Real Estate, FTSE All U.S. REITs represents U.S. Public Commercial the Financial Conduct Authority ,or the Central Bank of Ireland.
Real Estate, Short-term Treasury total return represents 1 year U.S. Treasury Bills,
Long-term Treasury total return represents 10 year U.S. Treasury Bond, S&P 500 • In Dubai by Principal Global Investors LLC, a branch registered in the Dubai
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