Is real estate still a viable inflation hedge in 2026?

Pricing Power, Regulation, and the Search for Inflation Resilience

Inflation has long been viewed as a challenge for real estate investors, with property historically seen as a safe haven during periods of rising costs. However, in the current economic climate, this traditional assumption is being tested, with investors and lenders forced to rethink how real estate behaves as an inflation hedge and exposing sharp differences between sectors, business models, and capital structures. 

With interest rates remaining high and inflation impacting various sectors differently, real estate investors must reassess whether property can continue to provide reliable protection against inflation. As we take our first steps into 2026, understanding how different asset types and market conditions respond to inflationary pressures will be crucial for future investment strategy success.

When Inflation Can Be Passed Through

The core question is simple: can you pass inflation through to rents without breaking your occupier base? 

Supply-constrained, operational sectors have been clear winners. In Spanish PBSA, extreme undersupply allows landlords to raise rents by roughly 9-10% in an environment of about 4% inflation, with investors deploying over EUR 1 billion in 18 months. Similar dynamics appear in Nordic senior housing, where operators can pass higher costs to government or private payers and still run healthy margins.

At the other end of the spectrum, tightly regulated residential markets have become almost uninvestable in an inflationary context. Ireland’s 2% rent cap, even on churn, has driven residential transaction volumes down by roughly 90%. Investors simply will not accept assets where real rental growth is structurally capped while costs rise faster.
 

The Sweet Spot: 2-4% Inflation

Research suggests that real estate performs best when inflation sits around 2-4%. In this range, indexation and market rent growth can keep pace with costs, and reputational risk in residential remains manageable. Above 4%, regulation, politics, and affordability constraints make full pass-through difficult, and real estate returns start to erode.

This is also the range where central banks are expected to cut rates, lowering the cost of debt and improving transaction viability. Expectations for 2026 are for the Consumer Price Index (CPI) to gravitate around 2%, with UK base rates drifting toward roughly 3.25%, supporting more accretive financing.

Equity Rotations and Lease Duration

In the last three years, many investors shifted from classic long-income to shorter-duration sectors where rents can rebase quickly: PBSA, multi-let industrial, hotels on variable performance structures, and certain healthcare assets. The ability to reset rents annually or even daily has been valued more than nominally low yields on long, capped index-linked leases.

However, shorter duration only works where there is genuine pricing power. Core offices in London or supply-constrained logistics can still attract capital because tight markets allow meaningful reversion at lease expiry. Where markets are weak or over-supplied, shorter leases simply accelerate downside.

Lenders, Margins, and Diversification

For lenders, inflation is mainly a question of tenant resilience. Thin-margin operators such as 3PLs or service-apartment platforms can be pushed underwater if rents rise 3% while their EBITDA margins sit at 5-10%. This risk has pushed lenders towards diversified portfolios: a residential block with 200 tenants, or a logistics portfolio with dozens of occupiers, is far easier to underwrite than a single leased asset.

Despite higher base rates, margins on good assets have compressed due to intense competition among credit funds and returning banks. Credit has looked attractive, with senior strategies targeting low double-digit returns, often outcompeting equity on a risk-adjusted basis. As rates fall and credit returns normalise, that balance is expected to shift back in favour of equity.
 

Repricing, Obsolescence, and ESG

Inflation and rate rises have widened yields across almost all sectors, but the depth of repricing depends heavily on rental growth and future capex. Nordic care homes, for example, moved from about 4% to 5% yields, yet indexation and secure income have kept total returns compelling.

By contrast, secondary offices and non-ESG-compliant stock have seen values hit by both yield expansion and looming obsolescence. The cost of upgrading assets to meet future ESG and regulatory standards has risen with inflation, and in some cases capex cannot be justified at all, effectively stranding assets.

Sentiment, Uncertainty, and the Road Ahead

A key reason transactions remain slow is not just inflation, but layered uncertainty: geopolitics, AI, construction-cost scars from recent years, and diverging macro views within investment committees. Deals that once closed in six weeks now routinely take six months, and many owners prefer refinancing or continuation vehicles to outright sales.

Even so, more activity is expected as inflation settles back into the 2-4% range, rates edge down, and the relative appeal of equity improves. In that environment, real estate can again operate as a credible inflation hedge - but only for assets with true pricing power, sensible regulation, and a clear plan to remain relevant over the next decade.
 

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Read more about the trends impacting CRE investment in the GRI Institute’s full Commercial Real Estate Europe Conference Spotlight.