The investment case for commercial property equity looks strong on the back of its high levels of income and its position as a hedge against inflation, says Rothschild Wealth Management.

With rents often linked to an inflation index, Rothschild says that commercial property is one of the most effective protections against inflation.

Moreover, with loose monetary policy and weak paper currencies, investors’ demand for physical assets is on the rise and commercial property is a natural destination for many, Rothschild says.

The wealth manager believes that the asset class has a return pattern and a risk-profile in the middle between bonds and equities. Rothschild thinks this is particularly appealing in the current low interest rate environment. At the same time, the firm acknowledges that rising interest rates would be a strong headwind for real estate.

Openings for capital-rich investors

The firm sees greatest opportunities in under-rated listed property and real estate investment trusts.

Listed real estate investment trusts are trading at a global discount of around 5 per cent, the firm says. The US looks slightly expensive, while the UK, Europe and Asia ex-Japan are undervalued, and Rothschild is especially keen on the latter region.

Rothschild also appreciates prospects in areas of the unlisted market where banks are “distressed sellers” and as well as influencing others to do the same.

In Europe, many banks have been forced to sell property assets as these assets face higher charges under Basel III. According to Rothschild's analysis, banks have also become more conservative in property lending. This will create opportunities for capital-rich investors, the firm says.