Between the COVID-19 pandemic and the current conflict in the Middle East, heightened inflation has been a consistent challenge for investors over the past decade. Inflation can be detrimental to a portfolio as it chips away at savings and investment returns. That’s why, when inflation picks up, investors often turn to tangible assets like commercial real estate as a hedging strategy.
Here, we break down the impact of inflation on a portfolio and look at why commercial property is considered a hedge against inflation.
Inflation risk
Inflation risk is the concept whereby rising prices erode purchasing power over time. For example, if inflation was to consistently sit at the midpoint of the Reserve Bank of Australia’s (RBA) target range (2.5%), one dollar today would be worth roughly half as much in 29 years’ time.
Subsequently, throughout periods of elevated or higher-for-longer inflation, purchasing power erosion happens much faster.
The concept of ‘real returns’ attempts to address this impact. Evaluating investment performance meaningfully requires an understanding of the distinction between nominal and real returns.
Nominal vs real returns
Nominal returns refer to the ‘raw’ return on an investment over a given timeframe. For example, if a $100 asset increases in value by $5, and over that period delivers $2 in income, its nominal return is 7% ($5 + $2 = $7, which is 7% of the $100 starting value).
If inflation over that same period is 3%, then the real return on the asset is only 4% (7% – 3% = 4%). Real returns factor in inflation.
Inflation doesn’t impact all investments the same way. Importantly, some assets that are considered ‘defensive’ can represent a poor mitigation against the impact of inflation.
When defensive assets don’t defend
Investments such as bonds, annuities and cash are often considered to be defensive, because they are perceived to be more stable than assets such as shares. However, these types of assets don’t offer much protection against the impact of inflation.
For example, if a bond pays 5%, but inflation spikes to 7.8% (as it did briefly in December 2022), then the nominal return does not outpace inflation, resulting in a negative real return.
Additionally, as a central bank raises interest rates to curb inflation, the value of certain types of bonds falls as newer bonds offer a higher yield to investors.
Commercial property as an inflation hedge
So, when defensive assets don’t defend, where do investors turn? In many cases, commercial property is a preferred asset class for investors seeking an inflation hedge.
Capital growth potential
Rising inflation can increase the cost of building materials. When interest rates are raised in an effort to curb inflation, such as in the current environment, borrowing costs increase. This makes developing new assets less viable and attractive, and can limit the pipeline of new stock coming to market.
Subsequently, this leads to increased prices for existing stock.
Inflation-linked rental income
It is common for leases to be tied to inflation. Many commercial property leases include fixed annual rental increases, often set above the long-term inflationary outlook or tied to specific increases in inflation.
For example, a lease on an industrial property may have annual rental increases which are the higher of a fixed percentage or inflation. This ensures rental growth should always offset or outperform inflation across the life of its lease.
How the Trilogy Industrial Property Trust hedges inflation
The Trilogy Industrial Property Trust (Trust) aims to provide regular monthly income and capital growth potential over the long term via a portfolio of properties located in key Australian regional and metropolitan industrial precincts.
As at 28 February 2026, the Trust held a portfolio of 17 properties with a gross asset value of $326 million1. Trilogy Funds favours assets located in tightly held precincts, particularly where replacement costs are high. Construction cost inflation flows through to demand for existing stock, aiding growth in the valuations of our portfolio.
Additionally, the lease structure for the majority of the Trust’s tenants involves fixed annual rental increases. Of this, 49% of our portfolio income is linked to the greater of a fixed percentage or CPI, with the remainder linked to fixed increases. This provides a further inflation hedge.
The Trust has delivered a total return (income and growth) of 9.01% per annum since inception2, 3.
The importance of a diversified portfolio
In high inflationary environments, portfolios should be positioned to limit the potential of inflation eroding real returns. As such, investors must have sufficient exposure to a diversified mix of asset classes, so as to outpace inflation.
Of course, everyone’s circumstances and financial goals are different, and past performance is not a reliable indicator of future performance.
While no single asset class can fully eliminate inflation risk, commercial property has historically demonstrated strong resilience through its income stability and capital growth potential. By maintaining a diversified portfolio with exposure to quality property asset, investors can better protect their real returns in periods of sustained price pressure.
1. Data updated as at 28 February 2026.
2. Based on 28 February 2026 unit price. Past performance is not a reliable indicator of future performance.
3. Inception data is reported on a per annum basis. Total returns measured from first distribution payment – May 2018.
This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) as responsible entity for the Trilogy Industrial Property Trust ARSN 623 096 944. Application for investment can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 3 March 2025. The PDS and Target Market Determination (TMD) dated 11 September 2023 for the Trilogy Industrial Property Trust ARSN 623 096 944 are available at www.trilogyfunds.com.au. The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy Funds, involve risk which can lead to no or lower than expected returns, or a loss of part or all of your capital. Trilogy Funds is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy Funds are not bank deposits and are not government guaranteed. Past performance is no indicator of future performance.
