Is real estate investment a smart idea during inflation?

Authored by Sudarshan Lodha, Co-founder and CEO of Strata Property Management.

Since 2021, several nations, both developed and developing, have been experiencing a period of high inflation. Much of this has to do with the vast sums of money pumped into the global economy to prop it up during the COVID-19 pandemic. Inflation has made a comeback between the highs and lows of the pandemic and the ongoing Russian invasion of Ukraine. Over the past few months, India has witnessed a jump of 7 per cent in retail inflation.

For investors, this presents an interesting conundrum. Yields in traditional ‘safe’ assets have not kept pace with inflation and the equity markets are too frothy to be considered stable. Real Estate, particularly those that can offer high yields or value appreciation may be the answer.

Why choose Real Estate investment?

Inflation has the potential to erode investment returns and income, so exposure to investment strategies that can insulate portfolios is critical. One such strategy is real estate. With increasing inflation, exposure to real estate will continue to offer portfolio advantage, as well as the potential for lucrative returns and earnings. 

At the time of higher-than-average inflation, real estate has generated attractive returns as compared to stocks and bonds. This is because the inflation escalators built into most leases allow rental growth that keeps pace with price increases. Additionally, certain property types traditionally have shorter leases, allowing landlords to frequently reset rents in line with rising costs.

Rising inflation potentially can lead to higher interest rates as RBI tightens monetary policy in response. This is not necessarily a negative for real estate returns. An improving economy can be linked to higher interest rates, which is generally advantageous for the fundamentals of the real estate market.

Considering the mounting cost of living, where people vigilantly assess returns on their investments, the critical question for the real estate industry is- What it means for investing in it? A suitable answer would be that regardless of the rising inflation, the spike in the value of your property would exceed your expectations.

If you are considering investing in real estate at a time of high inflation, you need to keep the following things in mind:

• Look for properties that are undervalued: During high inflation, prices of the property can increase hastily, so it's imperative to look for properties that are at present undervalued. This might sound challenging but exploring undervalued properties and seeking help from an expert in the field is a crucial step in this direction.
• Opt for fixer-uppers: A high inflation setting often poses challenges when it comes to finding properties that are in good condition and undervalued too. However, amid high inflation, a fixer-upper can offer a good opportunity to invest in real estate. By selecting the property yourself, you can add up value and certainly put it on the market at a profit later.
• Be prepared for higher interest rates: When inflation is high, interest rates usually follow suit. This means that if you are planning on buying a property with a mortgage, you should anticipate paying higher interest rates. Additionally, doing your research and working with a well-informed lender can help out a lot.

Timing is everything if you're looking to buy a property for investment purposes. You would like to buy it when prices are low and put it on the market when they're high. Sounds difficult? Fret not as there are times when prices tend to be at their lowest. All you must do is research. 

For instance, the ideal time to buy property is right after a recession as the demand during this time is quintessentially low while the supply is high. This typically results in lower prices, which can proffer a great opportunity for investors.

Of course, one should need to be aware of market conditions in a specific area. Just because there's a national recession doesn't mean that prices in cities will necessarily drop. They could even rise as people move to cities in search of better job prospects.

Conclusion

So, if anyone is thinking about investing in real estate, pay close attention to market conditions, both nationally and locally. This will thereby help you time your purchase accurately and is likely to give you a great return on your investment.

The present inflationary situation could be a chance to invest in a lucrative long-term asset. Just do your homework well and consult a financial advisor before making any decision.