Rethinking income investing: why real estate matters in a more inflationary world
In an era of higher inflation and tighter monetary policy, investors are reassessing portfolio income - including whether it can keep pace with rising prices. Private real estate should increasingly form part of that conversation.
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For much of the past decade, investors have been able to rely on a broadly synchronised global backdrop: central bank rates moved (lower) together, while valuations broadly and consistently expanded. Capital appreciation was the main game in town for portfolio returns, and equities markets were the flavour du jour.
This has now changed. The conflict in the Middle East and related energy price shock is once again bringing inflation considerations to the forefront as a key consideration for central banks. There are expectations that rates will therefore move higher again, although any tightening of monetary policy is uncertain and likely to take place over different time horizons.
Inflation could be higher for longer – rates implications across regions
Source: Schroders, Refinitiv Datastream, GS Marquee, 6 May 2026. Forecasts are not to be relied upon. For illustrative purposes only and not a recommendation to buy/sell.
As a result, investors are once again looking to income – not just as a source of yield, but as a core driver of total returns.
Broadening income horizons: Private markets
The case for a focus on income is especially relevant in a period of heightened volatility. Notably, it has historically accounted for a significant share of overall long-term returns across asset classes (see chart below).
Income provides consistency: dividends, cash flows and coupon payments provide a reliable return stream that compounds over time, whether markets rise or fall. This in turn can support downside resilience, helping to cushion returns in weaker markets.
Moreover, broadening the source of income return adds diversification by introducing differentiated sources of return, which is increasingly important as correlations become less reliable.
Private markets are especially relevant here. These asset classes, which are largely decorrelated from public markets, offer an extended income toolkit with potential to deliver meaningful diversification and yield premium to public credit risk.
The chart below shows the proportion of returns derived from income across three core asset classes – public equities, private real estate and intermediate government bonds – as well as the potential for enhanced income-based returns based on a back-tested portfolio comprising private debt and alternative credit, real estate equity and infrastructure equity allocations.
Private market income can be a strategic foundation of long-term returns
Past performance is not a guide to future performance and may not be repeated. 1Equities represented by Ibbotson® SBBI® US Large-Cap Stocks 1926 to 2024, S&P 500 thereafter, Global real estate by ANREV/INREV/NCREIF Global ODCE index from 2016 to 2025, bonds by Ibbotson® SBBI® US Intermediate Government Bonds (5 year maturity) 1926 to 2024, ICE BofA 5 Year US Treasury Index thereafter 2For illustration only. Private market income portfolio includes private debt, alternative credit and real assets. Real Assets=Schroders Greencoat Infrastructure Equity, Private Debt=MSCI (Burgiss) Private Debt, Alternative Credit=MSCI (Burgiss) Mezzanine and Distressed Debt. Back-tested performance illustrates returns for the private markets income, 60/40 and BB high portfolios.
Income in a re-inflationary environment: Real estate
For wealth managers and individual investors, the additional challenge today is often not simply how to generate long-term nominal returns, but how to generate income that can preserve purchasing power in real terms. In this context private real estate warrants closer attention.
Over time, a substantial share of real estate returns have come from income, as we showed in the chart above. Rental cash flows are less volatile than asset valuations and have proved relatively resilient during periods of higher inflation.
Historical data reinforces the point. By way of example, commercial real estate income in the US has consistently outpaced inflation over time. This is especially true during periods of economic expansion. In the post-GFC period, US real estate income delivered a 1.9% real (after inflation) return, while in the 1995-2000 period it delivered 2.7% real return.
US real estate income has outpaced inflation
... particularly during economic expansion
Past performance is not a guide to future performance and may not be repeated. Sources: FED, NCREIF, and Schroders Capital. April 2026. Right hand chart refers to annualised real estate income return, vs annualised CPI inflation for the years identified.
Three structural features help explain why real estate income specifically can act as an effective inflation hedge.
The first is contractual income growth. In several parts of the market, leases include explicit rent escalation mechanisms linked to inflation indices. These structures are common in segments including healthcare real estate, long-income strategies and parts of logistics infrastructure. Even where formal indexation does not exist, leases often include fixed uplifts that provide a degree of embedded income growth.
This creates an important distinction between real estate and nominal fixed income investments. By contrast, holders of nominal bonds receive fixed coupon payments that lose purchasing power as inflation rises.
The second driver is operational flexibility. Not all real estate sectors rely on long leases. Some of the fastest-growing segments of the market benefit from shorter-duration income streams that allow rents to reset more frequently. Hotels are perhaps the clearest example, where room rates can be adjusted daily. Student accommodation, self-storage, multifamily housing and parts of logistics real estate also benefit from shorter lease terms that allow landlords to respond more quickly to changing market conditions, notably cost pressures in the current environment. This effectively provides an ‘inflation passthrough’
The third factor is an intrinsic link between construction and rental levels. Over the long term, the prices for building materials and construction are components of aggregate inflation itself, and to preserve developer profitability, rental levels are highly correlated to build costs. More recently given supply chain disruption from the pandemic and conflicts, alongside materials shortages, construction costs have outpaced rental growth, creating a more constrained supply backdrop. This in turn underpins rental income levels and improves the growth prospects of established assets.
Construction costs are exerting cost-push pressures on rents
Source: JLL, CBRE, Eurostat, and Schroders Capital. January 2026. 27 markets in Europe. Shown for illustrative only and should not be interpreted as investment guidance.
Looking ahead
The argument for real estate income is increasingly forward-looking. During the low-interest rate era, falling yields played an important role in driving capital values across property markets. That tailwind is unlikely to be repeated to the same extent in a world of structurally higher inflation, higher financing costs and tighter monetary conditions.
That suggests future returns are likely to rely more heavily on underlying income growth – and that principle will also apply across other asset classes.
Supply dynamics may reinforce that shift. Higher construction costs have materially increased development expenses, while elevated borrowing costs have reduced the viability of new projects.
All of this does not remove the need for selectivity. Some areas of the market continue to face structural challenges, and not all assets will offer the same degree of pricing power. But for investors who expect inflation to remain higher than it was during much of the previous decade, the importance of income within real estate – and the potential for private markets, and private real estate in particular, to enhance portfolio income returns - looks set to increase.
For wealth managers, the broader implication is that the quality of portfolio income deserves greater scrutiny. Real estate may not offer perfect insulation from inflation shocks, but high-quality assets with durable tenant demand, disciplined leverage and the ability to grow rents remain well positioned to provide reliable income that can preserve real purchasing power over time.
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