Inflation-Hedging Properties of Indirect Real Estate Investments in Germany

This paper seeks to shed light on the question whether German real estate investment vehicles provide an effective hedge against inflation. To do so it aims to investigate open-end real estate funds, special funds and real estate stocks. Design/methodology/approach – Traditional approaches as well as cointegration and causality tests are applied to monthly and quarterly index data from 1992:04 to 2009:12 for the subject investment vehicles. Findings – There is strong evidence that real estate returns are almost independent from inflation in the short run. None of the investigated investment vehicles provide a hedge against expected and unexpected inflation at different lags. In contrast, cointegration tests show that real estate stocks, open-end funds and special funds do provide a hedge against inflation in the long term. Likewise, causality tests suggest that real estate performance is influenced by inflation in the long term. Research limitations/implications – The study still could not investigate closed-end funds and G-REITs. Yet, it does capture the most and comprehensive part of the indirect German real estate investment market. Practical implications – Inflation-hedging capabilities are of particular interest in periods of economic instability. Especially institutional investors with large asset portfolios seek to adjust their asset allocation to changing conditions. Originality/value – To date, research papers on the subject of inflation-hedging capabilities of real estate almost exclusively focus on REITs in the USA and in the UK. Research about the German real estate market and alternative investment vehicles is rare – partly due to a lack of transparency over the past – although international investors more and more adhere to the German real estate investment market