Journal of Property Finance 7,1 50 The long-term inflation- hedging characteristics of UK commercial property George Matysiak City University Business School, London, UK Martin Hoesli University of Geneva, Switzerland Bryan MacGregor and Nanda Nanthakumaran University of Aberdeen, Scotland, UK Introduction This paper reports the results from an investigation of the long-term inflation- hedging characteristics of UK commercial property. The extent of inflation hedging is important from a number of perspectives. Where real purchasing power is to be maintained or where liabilities are linked to the inflation rate, such as inflation linked pension entitlements, a suitable investment asset is required. In undertaking an actuarial valuation, the long-term rates of return on pension fund assets are assumed to exceed the rate of inflation. Consequently, assets which can deliver a positive real return are desirable investment holdings. There have been few UK studies investigating the relationship between inflation and the rates of return on commercial property, particularly from a long-term perspective. The purpose of the current paper is to address the question of inflation hedging of commercial property’s total rate of return over the long term by employing a cointegration analysis approach. The analysis employed in this paper differs from other work which looks at the correspondence between returns and inflation in that the returns achieved by other asset categories are explicitly included in the determination of commercial property’s rate of return, thereby avoiding potentially biased results. The paper is organized as follows: the next section outlines briefly previous work and the following section describes the data. The next section provides an outline of the concepts and methodology employed in the empirical analysis. The penultimate section gives details of the empirical results, with the last section providing concluding remarks and observations. Previous studies T he earliest work on property and inflation hedging in the UK was undertaken by Limmack and Ward (1988), using Fama and Schwert’s (1977) framework. Inflation is decomposed into two components, expected inflation and unexpected inflation. Expected inflation is calculated as the yield on three Journal of Property Finance Vol. 7 No. 1, 1996, pp. 50-61. © MCB University Press, 0958-868X