REITs and Inflation: A Long-Run Perspective

Abstract

We examine whether REITs provide an inflation hedge in the long run. We also investigate whether the apparent lack of a positive relationship between general prices and REIT returns in prior studies arises from the impact that stock market movements have on REITs. As in most prior research, regression analysis provides no evidence that REIT returns are positively related to temporary or permanent components of inflation measures. We rule out the possibility that a stock market-induced proxy effect is the cause for the apparent lack of relationship between REITs and inflation. On the other hand, we find some evidence that REITs provide a long-run inflation hedge. Johansen (1988) tests for cointegration isolate cointegrating vectors between alternate REIT indices and the CPI over the 1972-95 interval. However, the more standard residual-based cointegration techniques failed to provide similar evidence.