Inflation fear: where to ride the tide? Forecasting total returns with data intelligence


21 / 02 / 23 - 4 minute read

Key takeaways

  • During the last two decades economic cycles of strong growth have being accompanied by moderate inflation & vice versa. Less is known about recessionary phases with strong inflation.
  • Increased construction costs & delays limit new supply whilst increasing competition for existing properties. Assets with inflation-linked rental contracts are expected to be more resilient in inflationary regimes.
  • Average total returns are achieved in an economic environment with an inflation rate between 3% and 4% and 1% to 3% GDP growth. An economic recession of -2% with inflation close to 4% lead to negative total returns of ca. -2% (5% income & -7% capital growth). A stagnated economy (≈0%) does not lead total returns to decline from their long-term average as long as inflation is between 0% and 3.8%. Higher inflation levels leads to significantly falling total returns.
  • Office pricing has never been more dependent on financial markets than 4 today as shown by variance share of the 10-year gov. bond yields.
  • A 100-bps increase in 10 years gov. bond yields from 0% to 1% leads to an increase of 110 bps in office yields. Our model sees an increase in average European office yields from 3.5% in 2022Q3 to a peak of 5.3% in 2024Q2, i.e. 180 bps ceteris paribus.
  • Looking at properties held for at least four years, the increased market value and the income already achieved act as a 'buffer' for the recent valuation declines. As a result, investment values would remain comfortably over their initial values throughout most of our simulation. Even retail, as the most vulnerable sector, would regain its initial investment value by the end of 2025

Authors

Dr. Marcelo Cajias

Georg Kläger

Dr. Marcelo Cajias

Director Head of Data Intelligence | Investment Strategy & Research

Dr. Marcelo Cajias heads the Data Intelligence section, which is part of the Investment Strategy and Research team at PATRIZIA. In his role he is responsible for the global portfolio of analytical solutions and dashboards that support strategic investment decisions by means of supervised and unsupervised machine learning forecast models for various asset classes.

Marcelo holds a Ph.D. with his major fields being statistics, econometrics and real estate. His papers have been published in various international journals and he was awarded the RICS best paper award in 2011 and the German real estate research award in 2013.

Augsburg, Germany

Dr. Marcelo Cajias

Head of Data Intelligence

Georg Kläger

Senior Associate

Georg Kläger is a Senior Associate with the Performance Analytics Team in the Investment, Strategy & Research department at PATRIZIA SE, a position he has held since the spring of 2021. In that role, he supports the team in its efforts to move from Performance Measurements into Performance Analytics as integral part of the Research function. He is based in Augsburg Germany, the PATRIZIA headquarters. He was formerly employed as a Management Trainee working 2 years across several functions of the company, including Asset-Management, Transactions and Fund Management. Holding a Double-Master’s degree in Real Estate from both the Henley Business School Reading and the International Real Estate & Business school in Regensburg, he has also worked & studied in Croatia, the United Kingdom and Denmark. 

Georg Kläger

Dr. Marcelo Cajias

Director Head of Data Intelligence | Investment Strategy & Research

Dr. Marcelo Cajias heads the Data Intelligence section, which is part of the Investment Strategy and Research team at PATRIZIA. In his role he is responsible for the global portfolio of analytical solutions and dashboards that support strategic investment decisions by means of supervised and unsupervised machine learning forecast models for various asset classes.

Marcelo holds a Ph.D. with his major fields being statistics, econometrics and real estate. His papers have been published in various international journals and he was awarded the RICS best paper award in 2011 and the German real estate research award in 2013.

Augsburg, Germany

Dr. Marcelo Cajias

Head of Data Intelligence

Georg Kläger

Senior Associate

Georg Kläger is a Senior Associate with the Performance Analytics Team in the Investment, Strategy & Research department at PATRIZIA SE, a position he has held since the spring of 2021. In that role, he supports the team in its efforts to move from Performance Measurements into Performance Analytics as integral part of the Research function. He is based in Augsburg Germany, the PATRIZIA headquarters. He was formerly employed as a Management Trainee working 2 years across several functions of the company, including Asset-Management, Transactions and Fund Management. Holding a Double-Master’s degree in Real Estate from both the Henley Business School Reading and the International Real Estate & Business school in Regensburg, he has also worked & studied in Croatia, the United Kingdom and Denmark. 

Georg Kläger