Stagflation — the worrying combination of flat economic growth and rising prices — could be on the way back, one of the property industry’s most trusted analysts has warned.

Stagnation plus inflation caused untold damage in the 1970s in the wake of the 1973 oil price shock. Something similar could be happening now, MSCI said.

Whilst REITs are regarded as offering some protection — because rising costs translate into rising rents and capital values — the analyst consensus is beginning to look cloudy.

The background: It is now clear that rising inflation is not just a statistical fluke caused by unusually depressed prices during the pandemic. Energy cost increases are real and the cost of living in the UK is going to get worse before it gets better.

High energy costs prompted by the Russia-Ukraine war run the risk of squeezing the life out of the economy, and according to investment analyst MSCI the consequence could be stagflation.

A diversified portfolio of global equities, bonds and real estate could end up losing 13%, according to MSCI’s stress test.

“In our optimistic scenario, a ceasefire and de-escalation of the conflict could stabilize energy prices around current levels. Apart from a small short-term impact, there are no persistent inflationary pressures. The hit to economic growth is small, and central banks stick to their plans for tightening monetary policy,” MSCI said in a statement.

However, what they describe as “the grimmer scenario” involves long-term sanctions pushing up energy prices, long-term supply chain bottlenecks pushing up inflation, and slowed economic growth. “Equities plunge, credit spreads rise and the U.S. dollar gains versus the euro,” MSCI said.

The potential risk falls across all asset classes, although some analysts have relatively kind words for real estate.

“REITs are attractive alternatives given their inflation-hedging potential, although the historical evidence suggests returns are likely to be more modest in comparison,” Schroder said. “REITs offer a partial inflation hedge via the pass-through of price increases in rental contracts and property prices.”

AmInvestment Bank Research also had some mildly comforting words. Cautious bank lending to residential property, and land-banking by developers, lead them to take a neutral view of the stagflation risk for real estate in the markets it watches.

Depressed demand and raised construction costs could compress development profit margins, it said.