%20(1).png?width=600&height=338&name=menu_thumbnail%20(4)%20(1).png)
%201.svg){kind=small}
Matt Malone of Opto explains why real estate does well in inflationary environments.
Key Takeaways
- Matt Malone, head of Investment Management at Opto, says that a primary concern of investors today is inflation.
- Real estate does well during inflation because there is a limited supply of it - price is at its core driven by supply versus demand, so as demand and money circulating in the economy increases but supply of real estate doesn't its price increases.
- Also real estate often derives income off of rents, which are adjustable with inflation (though how closely it tracks inflation is dependent on the type of real estate, with something like hospitality able to adjust most frequently).
Transcript
Hi. I'm Matt Malone, head of Investment Management. I've spent over 15 years in the private markets in a variety of different roles, including performing diligence and analysis on alternative investment managers, structuring funds in the alternative investment space, and talking to financial advisors and their clients about alternative investment solutions to their portfolios.
So investors, especially now, are very concerned about inflation. We've been seeing inflation numbers creep up. There's a question of whether it's transitory or permanent. Investors are looking for real assets to protect themselves against inflation. And the reason why real assets and real estate specifically can provide an inflation hedge is that because they are tied to a hard asset, their value tends to appreciate over time. There's a limited supply, there's a limited amount of land on the earth. There's a limited amount of land in each city. And if you're an investor in an asset that's scarce in times of rising inflation, that's a good thing.
You want to be invested in something that's scarce and unique. Real estate is one of those assets, particularly in high-demand areas, but also they have an income generation component that can also be more or less sensitive to changes in the environment. So if you think about the different real estate sectors, on one end, you kind of have office, which tends to have longer-term leases, and then you move into sectors that have increasingly shorter-term leases. So if you think about multifamily or apartments, you know, you tend to have maybe 12-24 month leases and then you could move even into hospitality, which effectively has a one-day lease.
All of these different sectors have different rates of sensitivity to changes in inflation. So when you're thinking about using real estate as an inflation hedge, you want to be very thoughtful about your sector focus and make sure that the type of leases and the type of structure in the underlying real estate is able to adjust on a regular basis and you're not locked into a longer-term lease that may not have inflation protection built into it.
This is an important diligence item for investors looking at real estate strategies. If they're looking to use real estate, to hedge inflation, to think about how the income is being generated from that real estate and whether it's sensitive enough to changes in the underlying economy.
Important disclosures
Opto Investment Management, LLC (the “Firm”) is a wholly-owned subsidiary of Opto Investments, Inc. and is an SEC-registered investment advisor. Registration with the SEC does not imply a certain level of skill or training. SEC registration does not mean the SEC has approved of the services of the investment adviser. This website is operated and maintained by Opto Investments, Inc. Certain products described herein and institutional relationships may involve investment advisory services provided by the Firm. This website is presented for financial institutions and investment professionals only and is not intended for individual consumers or retail investors, unless specifically noted. Unless otherwise indicated, commentary on this site reflects the personal opinions, viewpoints and analyses of the author and should not be regarded as a description of services provided by the Firm or its affiliates. The opinions expressed here are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any security or advisory service. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. While all information presented, including from external, linked or independent sources, is believed to be reliable, we make no representation or warranty as to accuracy or completeness. We reserve the right to change any part of these materials without notice and assume no obligation to provide updates. Nothing on this site constitutes investment advice, performance data or a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. We disclaim any responsibility for information, services or products found on linked websites. Images and photographs are included for the sole purpose of visually enhancing the website. None of them show current or former clients and should not be construed as an endorsement or testimonial. All investing is subject to risk, including loss of principal. Historical performance is not a guarantee of future performance and clients may experience different results. This information contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of the depicted investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting operations that could cause actual results to differ materially from projected results. See related disclosures at https://www.optoinvest.com/disclaimers.
