Using Real Estate to Buffer Against Inflation | ETF Trends

Investors are understandably frustrated by listed real estate investment trusts (REITs). The S&P Real Estate Select Sector Index is off 2.1% over the past three years, belying real estate’s reputation as an inflation-fighting group.

However, that slump was more the result of rising interest rates, which punished rate-sensitive REITs. When it comes to inflation-fighting prowess, exchange traded funds such as the ALPS Active REIT ETF (REIT) continue to merit attention. After all, inflation remains elevated relative to historical norms. This indicates the escalator clauses found in many commercial lease contracts remain sources of allure for income investors.

“Leases across all types of sub-sectors can have explicit commitments to rental increases tied to inflation. In some instances, leases have fixed ‘escalators’ or rent reviews at specific times,” notes Schroders. “These all give investors the opportunity to earn a real return; that is, one that is above inflation.”

Other Tailwinds Linger for REIT

Alone, the inflation-beating properties offered by REIT are compelling, but there’s more to the ETF’s story. That includes several fundamental tailwinds that could prove meaningful over the long term. Take the case of data centers, which are experiencing significant demand due to the rise of artificial intelligence (AI).

“We can gauge the growth of data centres by looking at power consumption trends, and they are certainly encouraging, to take one example of a property sub-sector which looks to enjoy strong future growth prospects (see chart, below for U.S. trends),” added Schroders.

Data center REITs, including those residing in REIT, could be the real estate equivalent of a megatrend industry. Why? Because data center demand is expected to double by 2030 due in large part to AI. There’s already evidence of the structural growth tailwinds data center REITs could experience because data center supply has been struggling to keep pace with demand confirming an expansive runway for long-term growth in the industry.

The actively managed REIT features exposure to shares of data center REITs. Likewise, the fund devotes 17.15% of its portfolio to residential REITs making that its second-largest industry weight. Some of those holdings are apartment developers and landlords that are levered to the durable theme of increased urbanization. That’s pertinent to investors because shelter costs are one of the primary reasons why inflation has remained elevated for so long.

“Urbanisation, however, has remained an enduring underlying structural trend, and demand to live in cities is now at record highs with rents going up, benefiting the apartment sector, for instance,” noted Schroders.

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