Why property can thrive in inflationary or deflationary environments

Stenham Property managing director Paul Arenson (pictured) believes investors should focus on commercial property's ability to outperform in both an inflationary and deflationary environment when deciding whether to invest in the asset class.

Last week’s announcement by Stenham that it had sold a prominent commercial property in Grosvenor Gardens for £40 million, nine months after purchasing the building for £25 million, was another indication that commercial property was on the mend.

In fact, the sale of such a prominent 93,000 sq.ft building, acquired by Aegon Asset Management, was taken by many to be indicative of the resurgence in the asset class.

Overheating fears

After a strong recovery in the second half of 2009, commercial property is now posing a conundrum for investors, with some fund managers suggesting there may be a bubble building on the back of a tidal wave of retail investor money.

Although some investors have begun voicing fears, Arenson believes high quality commercial property is not in danger of overheating as investors are not paying excessive prices and are willing to accept lower returns. He said: ‘Last year we had a market of two halves; what you bought in the first rallied sharply in the second half.’

‘But property cycles in the UK tend to be generally long cycles of steady growth for 12-15 years with a few blips along the way. In a way we’ve just gone off the cliff so if you get in now you are probably going to see growth and be collecting income for the next 10 years. We could see extreme growth if we get inflation.’

The fear of inflation has prompted many investors to pile into property as they seek ‘real’ assets. However, Arenson notes commercial property where the income is secure, could be equally appealing for investors with a deflationary views.

He said: ‘In an inflationary environment property is perfect. But in a deflationary environment investors need fixed income and in a way property has an equity and a bond component if it’s well lent.’

‘If you have a secure income, that income can protect you in a deflationary environment even if your asset prices will fall. In a funny kind of way property is a very good asset class if you are not sure about the macro outlook.