Investment approach
Real Return on Real Estate: How to Account for Inflation
Real return is nominal return restated for lost purchasing power. According to INE, Spanish inflation in September 2026 was 4.9% on the flash estimate, and that changes the conclusion for a project.
Real return on real estate is nominal return stripped of inflation: (1 + nominal) / (1 + inflation) − 1. With a nominal 5% and inflation of 4.9%, the real return is about 0.1%. According to INE's flash estimate of 29 September 2026, annual inflation in Spain is 4.9%, so a nominal 5% currently brings almost no real gain.
The real return formula
The exact formula: r = (1 + n) / (1 + i) − 1, where n is nominal return and i is inflation over the same period. The familiar approximation r ≈ n − i works at low rates and gives an error at high ones: for n = 8% and i = 4.9%, the approximation gives 3.1%, the exact formula 2.96%.
The period in the formula must match. If a project runs 18 months and returned 13.1% over the whole term, it has to be compared with cumulative inflation over 18 months, not with the annual figure. Or convert both to annual terms.
What INE inflation shows now
INE figures as of 12 October 2026:
- IPC (Índice de Precios de Consumo, the consumer price index) for August 2026: 4.3% against August 2025 (INE, published 15 September 2026), core inflation 2.9%.
- Flash estimate (adelantado) of IPC for September 2026: 4.9%, core 3.1% (INE, 29 September 2026).
INE names fuel as the main factor, which was getting cheaper a year ago and is now getting dearer, and tourist packages, which are falling more slowly than a year ago. A flash estimate may change: INE publishes the final September figures the following month. Nobody knows what inflation will be a year from now, so several values are put into the calculation. For reference: the ECB defines price stability as inflation of 2% over the medium term (ECB, inflation target), and the table below takes this value as the first point.
IPC measures the prices of a consumer basket. It is not a housing price index and not an index of rental rates. It answers the question of how much the goods you buy with the returned money have come to cost.
Table: what is left after inflation
Real return in annual terms, Fisher formula. Inflation of 2% is the ECB target, 3% is an intermediate worked-example point, and 4.9% is INE's September flash figure.
| Nominal return per year | Inflation 2% | Inflation 3% | Inflation 4.9% |
|---|---|---|---|
| 3% | 1.0% | 0.0% | −1.8% |
| 5% | 2.9% | 1.9% | 0.1% |
| 8% | 5.9% | 4.9% | 3.0% |
| 10% | 7.8% | 6.8% | 4.9% |
The same nominal result looks different. A 5% return with inflation of 2% gives almost three points of real gain, and at 4.9% almost nothing.
Example: an 18-month project
Worked example, not a forecast. Take the project from the article on how to calculate returns: ROI before capital gains tax of 13.1% over 18 months, an annual IRR of 8.6%.
With inflation of 4.9% a year, cumulative inflation over a year and a half is 1.049^1.5 − 1 = 7.4%. The real result over the whole term: 1.1315 / 1.0744 − 1 = 5.3%. In annual terms the real return is about 3.5%.
If inflation over the life of the project rises, the conclusion changes. If it falls to 2%, the real result is higher. A project cannot influence this parameter, so it is always assessed as a scenario. What scenario analysis is and how to build it is described in the article on sensitivity analysis.
Limits of the calculation
IPC inflation is for Spain as a whole. Yours may differ: if the investor's expenses are in another currency, the inflation of their country and the euro exchange rate matter. For an investor whose expenses are in euros, a calculation based on IPC fits.
Taxes are calculated on nominal profit. How capital gains tax accounts for inflation in your status (resident, non-resident, company) is a question for an asesor fiscal (tax adviser). The higher the inflation, the more tax on nominal profit eats into the real result.
The formula does not answer whether real estate protects against inflation. That depends on the entry price, rental restrictions, demand and the term. There is no general answer, and a conclusion is not drawn from a single year.
How DNPI Capital calculates project metrics is described on the /methodology page. If you need to compare a project's real result with other ways of placing money, see the article on real estate, deposits and bonds.
Questions and answers
What is real return in simple terms?
It is how much the purchasing power of your money has grown. If you earned 8% and prices rose 4.9%, the final sum buys about 3% more than before.
Which inflation should I use for a calculation in Spain?
The annual IPC from INE for a period equal to the project's term. For future periods, use several scenarios, not one forecast.
What does negative real return mean?
Nominally you earned money, but it now buys less than before the investment. That happens with a nominal 3% and inflation of 4.9%.
Does real estate protect against inflation?
Not necessarily. The result depends on the entry price, the term, rental restrictions and the state of the market. There is no universal answer.
