LONG-TERM INFLATION HEDGING PROPERTIES OF DIRECT REAL ESTATE INVESTMENT: A METHODOLOGY TO STUDY INFLATIONíS PROTECTION GIVEN THE LEASE STRUCTURE AND THE INDEXATION USES

Charles-Olivier Amédée-Manesme, Michel Baroni () and Etienne Dupuy

ERES from European Real Estate Society (ERES)

Abstract: This study suggests a model to analyze the inflationís hedging characteristics of direct real estate investments taking into consideration the lease structure, the indexationís typology and the current and forecasted state of the market. Using both Monte-Carlo simulations for the price of the assets and the market rental values and options for the tenantís behavior, we afford to study inflationís protection of any direct real estate investment given the current and the forecasted state of the market. In particular we are able to study the risk possibly incurred by this protection by studying the possible reversion of the indexed rents. The model uses Monte-Carlo simulations to measure differences between simulated market rental values and indexed rents and analyses the impact of this evolution to the tenantís behavior. Our model makes one able to study how this behavior impacts the cash flows paths distribution and consequently the likely inflationís protection. More specifically, one is able to determine according a predicted future evolution of the market if the indexationís methodology will weaken or not the lease. This paper innovates by making possible a comparison of all the leasesí properties at the hands of inflationís hedging. After a brief review of literature on inflationís hedging and particularly on real estate inflation protection features, the paper describes the suggested model. We focus on tenantís behavior regarding the state of the market and regarding its lease and how this behavior influenced the inflationís hedging protection. We conclude by a comparison of some of the major European lease structure.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2010-01-01
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