Question 2 (25 marks) (a) Suppose that you are advising a client who is interested in investing in commercial real estate. Your client wants to know if real estate could be a good inflation hedge. Explain to your client why certain real estate lease characteristics ensure that real estate is a good hedge against inflation. Keep your answers concise. (10 marks) (b) See Table 1 below. With reference to your answer in 2(a) and the evidence shown in Table 1, state if real estate is a good inflation hedge when compared with other asset classes. Briefly explain your answer. (15 marks) Table 1: Correlation Matrix using Quarterly returns 2002-2011 S&P500 Index Barclays Aggregate Bond Index Consumer Price Index NCREIF NAREIT Townsend Equity Core Index Index NCREIF Townsend 1.00 Core Index NAREIT Equity 0.23 1.00 Index S&P 500 0.19 0.76 Index Barclays Aggregate -0.14 -0.04 Bond Index Consumer 0.26 0.18 Price Index Source: PSN, 2012 1.00 -0.31 1.00 0.09 -0.41 1.00 [" The NCREIF Townsend Core Index presents performance information of private equity real estate funds pursuing core investment strategies]