Many investors have been worried that record stimulus, up to $11 trillion worth, could trigger a return to 70’s style inflation.
In reality, the bond market, while pricing in steadily higher inflation expectations, is nowhere close to matching the 13.5 percent inflation we saw in 1979.
However, what if we keep spending record amounts of money and inflation does rise above the modest levels currently anticipated? Here’s why REIT investors almost never need to fear inflation.
The 1970s: As Bad As Inflation Is Likely To Ever Get In The US
The 1970s saw inflation peak at 13.5 percent in 1979. From 1978 to 1980 3-year average inflation was 11.6 percent, the highest in US history.
This was a result of a perfect storm of long-term policy mishaps, the fault of no less than five presidential administrations and three Fed President regimes.
But here are the two facts that are why REIT investors should sleep well at night, no matter how low or high inflation might ever get in the future.
First, let’s examine the correlation between REIT returns from 1972 to 2019. Since inflation is the #1 thing the bond market uses to price Treasury yields, let’s use the 10-year yield as the proxy for inflation.
From 1972 to 2019 had you been able to predict inflation with perfect accuracy, and thus long-term interest rates, guess how well you could have predicted REIT returns in any given year?
● Just 2 percent.
● And only if you assumed that a bit of inflation and thus rising interest rates was ever so slightly beneficial to REITs
Of course, 47 years of interest rate, inflation, and REIT return data is rather anti-septic. After all, a half-century is longer than almost anyone has as far as time horizons go.
So how about we consider the single worst period for inflation in all of human history. After all, the inflation we saw in the late 1970s and early 1980’s, which brought with it interest rates as high as 20 percent, is almost certain to be as bad as inflation or high rates will ever go in our lifetimes.
Here are some priceless quotes from a study from NAREIT and the Wharton School of Business. (Inflation and Real Estate Investments),
“Consumer price inflation (CPI) in the U.S. was 13.5% during 1979, the worst year since 1947. Dividend income from REITs traded through the stock exchange averaged 21.2% that year, and total returns amounted to 24.4%, more than preserving for REIT investors the purchasing power that they had lost to inflation.”
In a year when inflation was 13.5 percent and long-term interest rates were double-digits, REITs returned 24.4 percent or 10.9 percent after inflation.
From 1972 to 2020 REITs delivered 11.5 percent annual total returns. In 1979 it was 24.4 percent. Literally, the worst year for inflation, and some of the highest interest rates in history, and REIT’s more than doubled their historical returns.
But that’s just one year. So let’s consider a longer time frame, but one that still haunts inflation-fearing investors to this day.
“Inflation averaged 11.6 percent per year during 1978-1980, the worst three-year period in six decades; again, however, publicly traded equity REITs outpaced inflation with income and total returns averaging 12.2 percent and 23.1 percent per year, respectively.”
From 1978 to 1980 was the single worst period of inflation in modern US history. And yet even after accounting for 11.6 percent average inflation, REITs delivered 11.5 percent average annual total returns.
● What REITs have delivered since 1972 in absolute terms they delivered in inflation-adjusted returns during the worst inflationary period in history
But what if this is simply an example of cherry-picking historical data? It’s not.
“The period 1974-1981 was the most inflationary eight years in the history of the Consumer Price Index at 9.3 percent per year, but equity REIT returns easily preserved purchasing power, with income and total returns averaging 10.2 percent and 16.3 percent per year.”
For the eight worst years in US inflationary history, REITs delivered inflation-adjusted total returns of 7.0 percent.
How did the S&P 500 do during literally the worst inflationary period in history?
● 1974 to 1981 S&P 500 delivered 10.1 percent CAGR total returns
● 0.8 percent adjusted for inflation
● The stock market was a good hedge against inflation
● REITs beat the stock market by almost 9X in inflation-adjusted total returns
REITs, just like any company, will pass on price hikes when inflation is high. In fact, many rental agreements even peg annual rental hikes to inflation.
And this is hardly the only study that shows REITs are a wonderful long-term investment, regardless of inflation and interest rates.
A 2019 Dutch study looked at global assets, in both nominal and inflation-adjusted terms, all over the world, from 1960 to 2017.
● Including the high inflation periods of the 1960s and 1970s
Guess what the best performing inflation-adjusted asset class in history is?
● Global REIT inflation-adjusted total returns: 6.4 opercent CAGR
● Global stock real returns: 5.5 percent CAGR
● Non-government bonds: 3.5 percent CAGR
● Government bonds: 3.1 percent CAGR
Sky-High inflation in the US? It’s worth owning REITs.
High inflation globally? It’s worth owning REITs.
Modest or low inflation in the US or globally? It’s worth owning REITs.
The generous, safe, and growing income that REITs deliver over years and decades, makes them a wonderful asset to own in literally all economic, interest rate, and inflationary environments.