Grant Jones on Dec.28.2007. 19:28

Affect of Inflation on Aggregated REITs or R/E "Derivitives"

Our company is a commercial lender. Real equity in real property drives and sustains our business. We follow real estate trends more religiously than fashion hem lines, since they affect the value of the property we hold to secure loans. The residential market was long in coming, but evident in the making at least 2-3 years ago when in most US markets, someone would buy anything anywhere for prices that were considered ridiculous the year before, and sometimes the month before.

The commercial markets were susceptible to some of the same buying fever, but for different reasons, as more and more super wealthy began looking for ways to shelter ever growing piles of cash. Your article suggests there is a top to that, but in the face of looming, and very real, inflationary pressures, the attraction of hard assets will become so irresistible to such people, companies, and nations, that the normal rules of valuation will be replaced with a metric that gauges the inflationary loss of money against the premium asked for the property. Moreover, the piles of money [hundreds of billions to trillions] is so huge, that efficiency will ultimately dictate something like derivatives, huge REITs, or the like, to soak it all up in time to be effective against rapidly changing monetary values.

It would be of substantial interest to those of us in the commercial lending market to see more definitive articles along these lines before we hit the inflationary skids, since the prices of leveraged properties NOT tied to big money interests will fall until they are picked up like ripe cherries by well funded assemblers.