Inflation is a major current topic of the moment destined to last, and is an important parameter in the evolution of returns on savings. It is indeed better to invest in supports that protect against inflation by integrating a revaluation linked to the evolution of prices. It is customary to say that real estate is part of this category in the sense that the revaluation of rents includes an inflation component.
Rental investment
For a direct rental investment, the latest rent reference index (IRL), which serves as the basis for the annual rent review, has for example increased by 2.48%. This is the sharpest rise in the IRL for almost 14 years because this index takes into account the evolution of consumer prices over the past 12 months. The variations of the next IRL should therefore remain significant.
SCPI
With regard to collective investments in real estate offering good protection against inflation, we can of course cite SCPIs whose returns from the distribution of rents also benefit from periodic revaluation via other indices integrating inflation components.
ILAT and ILC
Office SCPIs use the tertiary activities rent index (ILAT) which is used to review rents for professional leases. The ILAT applies to tenants of offices, logistics warehouses or other business premises. The latest ILAT published by INSEE increased by +4.30% over one year, after an increase of +2.96% in the previous quarter. For commercial activities, SCPIs use the commercial rent index (ILC) which showed in its last update an annual increase of +2.42% after +3.46% in the previous quarter.
The ILAT and the ILC are mainly calculated from the Consumer Price Index (excluding tobacco and rents) and the New Construction Price Index, which is also experiencing a strong increase derived from the evolution the price of raw materials. We can therefore see that the owners of SCPI shares do not have to worry about inflation from the point of view of the evolution of rents. However, management companies are responsible for selecting tenants capable of supporting these rent increases…
Rate hike
On the other hand, there is another parameter to take into account: inflation pushes up borrowing interest rates. This will generate additional costs for SCPIs which finance part of their real estate investments with debt. For a direct rental investment, the rise in rates can already be measured with a rise of half a point in a few months, which therefore slightly alters profitability.