Investors Hide From Inflation in Real-Estate Stocks

As the economy recovers from its pandemic-induced slowdown, some investors are worried that rising prices could erode company profits and push the Federal Reserve to lift interest rates sooner than expected.

Money managers often turn to real-estate stocks when they anticipate higher inflation because of the segment’s pricing power.

Some leases are tied to inflation and many tenants bear a rent increase to avoid the cost of moving.

Other industries, such as restaurants and food retail, have more competition and a more price-sensitive consumer.

Consumer prices rose 5% in May from a year earlier, according to the U.S. Labor Department, the biggest surge in inflation in nearly 13 years. Federal Reserve officials signaled Wednesday that they expect to raise interest rates by late 2023 as inflation picks up.

“The real question is does inflation become a bigger worry or a smaller worry,” said

Jonathan Woloshin,

head of U.S. real estate at UBS Global Wealth Management. “If inflation continues to be a worry, I think people will look to real estate as an inflation hedge.”

Shares of office owner

Boston Properties Inc.

and data-center landlord

Equinix Inc.

already climbed 20% and 19%, respectively, since the end of March.

The sector traded Tuesday at almost 24 times its projected earnings over the next year, above a five-year average of almost 19.

The S&P 500 as a whole traded at 21.5 times its future earnings.

The energy group of the S&P 500, another strong performer in inflationary times, also has beaten the market, rising 13%.

The recent allure of real-estate shares stands in contrast to last year. The sector dropped 5.2% in 2020 as the coronavirus pandemic closed shops and restaurants, slowed visits to hotels and prompted a shift to working from home that threatened the outlook for office buildings.

The rollout of vaccinations has allowed the U.S. economy to open more fully, particularly boosting real-estate stocks most hurt by the shutdowns.

For instance, mall giant

Simon Property Group Inc.

slumped 43% in 2020 as stay-at-home orders closed shopping centers, but has gained 53% so far this year.

Investors need to sweat the details of their real-estate bets: Some properties, like offices and retail, can have very long leases. If those agreements don’t adjust rent to account for inflation, landlords could see their real incomes shrink.

But overall, equity investors see the sector as an attractive corner of the market when prices are rising.

Lackluster bond yields have made the real-estate segment’s dividend payments more appealing. The yield on the benchmark 10-year U.S. Treasury note settled at 1.569% on Wednesday while the real-estate sector of the S&P 500 has a dividend yield of 2.6%. The broader index has a 1.4% dividend yield.

Write to Karen Langley at karen.langley@wsj.com