Real Estate Assets Will Play a Key Role in Combating Inflation Risk

On November 10, 2021, the US Labor Department released data indicating that the year-over-year inflation rate had reached 6.2 percent, which is the highest it has been since November 1990 and a notable increase from a rate of 5.4 percent the month before.

This increase in inflation has spurred a strong degree of economic uncertainty for all types of investors. Inflation uncertainty increases the risk of most investments because even if an investment has increased in terms of nominal dollars, that doesn’t necessarily mean its real value has also increased.

Prior to 2021, the highest the annualized inflation rate had been over the past decade was 3 percent, which occurred in 2011. Of course, this recent spike in inflation hardly took economists by surprise—increased government spending, supply chain and labor challenges, and economic volatility caused by the COVID-19 outbreak all created a situation in which at least some inflation would be inevitable. Nevertheless, the numbers from this November were still above economists’ forecasts.

Because inflation increases uncertainty, some investors might be hesitant to make any major moves. But, as history has demonstrated, economies with high levels of inflation are often the best time to realign your portfolio—particularly in real estate and connected assets. Below, we will discuss why real estate investments will play a critical role in combatting inflation risks.

Why Real Estate is the Ideal Investment During Periods of Inflation

“If you have cash and are expecting inflation, you want to think through where you can put your money so it does not lose value,” states economist Ali Wolf, “Housing is commonly looked at as a good inflation hedge, especially with interest rates so low.”

While some investors might like to ‘play it safe’ by keeping their wealth in mostly liquid assets, like cash or easily accessible money market accounts, doing so is the surest way to guarantee you are losing spending power over time. For an investment to be worthwhile—in other words, for your wealth to actually increase—you will need to select an investment that appreciates at a rate that’s greater than inflation.

And when inflation has reached the staggeringly high level of 6.2 percent year-over-year, that means that investing in high-interest savings accounts, T-bills, and other safe but unrewarding assets simply isn’t going to cut it.

Over the course of 2021, the real estate market has been booming. According to CEIC Data, the growth in residential property values has continued to outpace the inflation rate, with data from the most recent quarter suggesting a 16.4 percent annualized increase—and the market is showing few signs of slowing down.

Furthermore, a fixed-rate mortgage—whether for your own property or an investment property—is a great way to lock in a monthly payment. Even if the inflation rate increases further, your monthly payments stay the same. As inflationary pressures grow, the real amount an investor spends on property payments will continue to decrease over time.

October was an Incredible Month for REIT Investors

With the month of October pushing inflation to new heights, one might assume that certain investments classes, such as real estate investment trusts (REIT), might experience a decline in growth. In actuality, the trend has been moving in the opposite direction, with October being one of the highest performing months for REIT stocks to-date.

According to the FTSE Nareit US Real Estate Index, REIT stocks grew in value by an impressive 6.92 percent during October—this represents the second-best month for REIT stocks over the course of the pandemic, with only April 2021 performing higher (7.89 percent). Certain bundles of REIT stocks performed even better. For example, the Real Estate 50 experienced more than 7 percent growth in October alone.

Of course, some might be quick to observe that the recent uptick in REIT stocks can be at least partially attributed to the somewhat lousy performance these stocks had the month before, in September. And to a certain extent, they’d be right. But even when accounting for the September dip (about 5 percent), REIT stocks have since been rallying despite widespread inflation and have already enjoyed a stellar November performance. 

Developing an Inflation-Resistant Real Estate Investment Strategy

REIT stocks are just one way for investors to enjoy the growth of the broader real estate market, an asset class that regularly outperforms the stock market. The universal need for housing, remarkably low interest rates, and limited housing supply have all combined to cause real estate investments to rally.

Perhaps the best way to take advantage of this surging real estate market is by investing in real estate syndications. Syndication makes it possible for investors to own a direct stake in a particular property and potentially enjoy annualized returns of eight percent or more.

The increase in inflation will almost certainly cause even more capital to be shifted away from low-return accounts and towards investments that actually appreciate in value—investors know that the more they keep their money in reserves, the more spending power they will lose as time goes on. An increase in inflation will also cause interest rates to remain low, which helps explain some of the most recent behaviors by the Federal Reserve. Currently, the Federal Funds Effective Rate is just 0.08 percent, which is practically the lowest it has ever been.

To develop an effective real estate investment strategy, it is important to choose properties in high-demand areas. But regardless of whether you choose to invest with a real estate syndicate or choose to put your money elsewhere in the real estate market, it is clear that, for the savvy investor, high inflation is really just code for new opportunities.

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