• Indraneel Karlekar is Head of Research for Principal Real Estate, which manages nearly $ 100 billion.
  • He told Insider he believes investors will continue to use real estate as a hedge against inflation.
  • He also touched on 3 other themes guiding real estate investment decisions.

American investors are increasingly concerned about inflation.

Inflation is calculated from the change in the price levels of a “market basket” of goods, the most important measure being the consumer price index (CPI). This year, the annual inflation rate exceeded 5% for the first time in more than a decade.

“Inflation in the United States has been a hot topic, especially since it has been high in recent months,” Indraneel Karlekar, managing director of Principal Real Estate, told Insider in a recent interview. “There is a lot of debate as to whether this will be transient or stay high.”

If inflation remains high, retail investors will turn to durable assets that offer inflation protection, according to Karlekar. This will make real estate an area to watch.

“Many advisers are allocating extra dollars to their clients’ portfolios to stay ahead of inflation over the next three years,” he said. “We are seeing an active rotation or rebalancing, with capital flows from retail investors turning to durable assets with inflation-hedging capabilities.”

Karlekar, a 20-year real estate veteran, heads Principal’s research and strategy unit for the industry. His employer is one of the world’s top 10 real estate companies, managing or sub-advising nearly $ 100 billion in assets.

“The search for yield has not diminished, the search for diversification has not diminished, and real estate can still be an anchor for growing your portfolio,” he told Insider. “It makes me very confident and positive about the future of this asset class.”

Insider spoke to Karlekar about how retail investors can buy durable assets like real estate to beat inflation. He also broke down three other trends to watch out for.

Beat inflation

Many retail investors have limited experience with inflation.

“We haven’t really had a period of sustained inflation since the 1970s,” Karlekar told Insider. “A lot of people face a very strange environment – they’re not used to 5% inflation, they’re used to 2%.”

Retail investors should turn to durable assets if inflation remains high, according to Karlekar. A sustainable asset refers to a resource with fundamental value, usually commodities, energy or real estate. These assets tend to lose less value than others during periods of sustained inflation.

“Investors are increasingly turning to assets that can increase income beyond inflation, or at least equalize inflation,” Karlekar said. “Real estate makes a lot more sense than fixed income because bonds are a softer asset. “

Fixed income securities tend to suffer the most when price pressures intensify, as inflation erodes returns over time.

Karlekar told Insider that investing in properties with shorter leases gives investors even more protection against inflation.

“The types of leases that offer the most protection are the shortest leases,” he said. “Come to think of it, owning a hotel is the best hedge against inflation because you can set up overnight leases.”

Karlekar particularly likes structural real estate as a way to protect a portfolio. It goes beyond conventional residential or commercial office real estate and instead focuses on assets that are more isolated from broader macroeconomic trends.

“We’re seeing a lot of interest in structural real estate strategies, where there’s a lot of structural growth,” Karlekar told Insider. “Data centers are very hot right now, just like industrial warehouses, cold storage is a little more niche but is becoming more and more attractive.”

“What is common to the latter are their powerful structural drivers,” he added. “They are not dependent on cycles of economic growth.”

Themes to watch

Karlekar said

Federal Reserve
monetary policy will affect the real estate market. The Dow Jones Industrial Average jumped 338 points on Wednesday after the Fed said it would start cutting stimulus “soon”. This could include an increase in interest rates.

“We have all benefited from extraordinary largesse from the central bank over the past two years, and that has led to this very strong asset recovery that we have seen over the past 18 months,” he told Insider .

When interest rates rise, the cost of borrowing increases, which means mortgages become more expensive. This has an impact on home buyers and sellers.

“A lot of retail investors have been used to low rates for a long time, and many are heading into an age where they have to throw away their savings,” Karlekar said. “Investors are now positioning themselves for higher interest rates.”

“When rates go up there will be more volatility,” he added. “This means that many investors are adding more real estate to their portfolios.”

Principal’s research team also noted that retail investors are increasingly turning to private goods. These are investments that are not listed or traded on a stock exchange, including infrastructure, insurance, private equity, and real estate.

“The pandemic catalyzed a pre-existing trend,” Karlekar told Insider. “There has been an increasing use of private vehicles, and real estate occupies a very important place.”

One of the ways for investors to buy these alternatives is to

(real estate investment company), an investment vehicle that finances or owns income-generating properties. Karlekar said non-traded REITs, which are marked on a quarterly basis rather than traded daily, were particularly on the rise.

“Retail investors want to have access to small pieces of these investment strategies,” he told Insider. “Non-traded REITs offer very stable returns to investors and they are becoming an important part of the real estate universe in Europe and the United States. “

Finally, the ESG The megatrend of analyzing a business based on environmental, social and corporate governance factors has an impact on real estate, Karlekar said.

“The ESG phenomenon has been given wings by the pandemic, especially the social aspect,” he said. “Investors are striving to incorporate ESG into their real estate strategies, which means building solar panels, reducing new development, securing more equitable housing opportunities and investing in disadvantaged areas. “

“It’s now very much embedded in the way real estate investors view the world,” Karlekar added. “I would say all of these global trends are here to stay.”


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