Inflation expectations among economists are quite different right now. One side agrees upon the outlook for moderate price level increases, whereas the other side expects high inflation figures due to recent highly expanding monetary policy worldwide.

But what if the prices indeed begin soaring; how one can hedge against inflation? Real estate is a good choice. This is a widely discussed issue among academics, and full unanimity has not been reached. Nevertheless, the majority seems to agree that real estate provides at least partial inflation hedge, and in the following my supporting arguments are presented.

In most cases income stream is inflation-protected as contract rent is often tied to Consumer Price Index, providing the landlord with a robust shield for both expected and unexpected inflation. One might argue that there are still risks involved in the development of operating cost level, because as seen in the course of past years, operating expenses tend to increase faster than gross rents. This is very true, and hence, even stronger hedge is attained where tenants get the responsibility for costs through a net lease agreement.

The downside here is that when the inflation starts soaring the interest rates will also be higher, which in its turn affects the yields - and thereby capital growth. Typically when inflation hedging capability is discussed, this component of total return is omitted. However, owing to recent significant yield shift, properties are today priced fairly moderately, leaving less room for further capital depreciations.

Some alternative property type may provide better inflation hedging capability than others, but the best ones have at least one thing in common: low vacancy rates. In Finland I would argue that rental apartments and shopping centres would serve as the most efficient inflation hedge today.