Inflation hedging and protection characteristics of infrastructure and real estate assets. Issue 1 (2nd February 2015)

• Record Type: Journal Article
• Authors: Wurstbauer, Daniel; Schäfers, Wolfgang
• Is Part Of: Journal of property investment & finance. Volume 33:Issue 1(2015)
• Page Start: 19
• Page End: 44
• Publication Date: 2015-02-02
• Subjects: Real estate -- Co-integration -- Inflation hedge -- Inflation protection -- Infrastructure investments -- Shortfall risk; Real estate investment -- Great Britain -- Periodicals; Real property -- Valuation -- Great Britain -- Periodicals; Real estate development -- Great Britain -- Finance -- Periodicals; 332.6324094105
• DOI: 10.1108/JPIF-04-2014-0026
• Languages: English
• ISSNs: 1463-578X

Abstract

Abstract : Purpose: – Similar to real estate, infrastructure investments are regarded as providing a good inflation hedge and inflation protection. However, the empirical literature on infrastructure and inflation is scarce. Therefore, the purpose of this paper is to investigate the short- and long-term inflation-hedging characteristics, as well as the inflation protection associated with infrastructure and real estate assets. Design/methodology/approach: – Based on a unique data set for direct infrastructure performance, a listed infrastructure index, common direct and listed real estate indices, the authors test for short- and long-term inflation-hedging characteristics of these assets in the USA from 1991-2013. The authors employ the traditional Fama and Schwert (1977) framework, as well as Engle and Granger (1987) co-integration tests. Granger causality tests are further conducted, so as to gain insight into the short-run dynamics. Finally, shortfall risk measures are applied to investigate the inflation protection characteristics of the different assets over increasingly long investment horizons. Findings: – The empirical results indicate that in the short run, only direct infrastructure provides a partial hedge against inflation. However, co-integration tests suggest that all series have a long-run co-movement with inflation, implying a long-term hedge. The causality tests reveal reverse unidirectional causality – while real estate asset returns are Granger-caused by inflation, infrastructure asset returns seem to cause inflation. These findings further confirm that both assets represent a distinct asset class. Ultimately, direct infrastructure investments exhibit the most desirable inflation protection characteristics among the set of assets. Research limitations/implications: – This study only presents results based on a composite direct infrastructure index, as no sub-indices for sub-sectors are available yet. Practical implications: – Investors seeking assets that are sensitive to inflation and mitigate inflation risk should consider direct infrastructure investments in their asset allocation strategy. Originality/value: – This is the first study to examine the ability of direct infrastructure to assess inflation risk.