The issue of inflation has recently made headlines again.
The complex period that the world is going through due to the effects of the coronavirus on the one hand and global geopolitical events on the other hand, has led to a situation in which inflation is rising and its impact on capital market and real estate investors is large and significant.
Investors should be more careful during these types of periods and examine the appropriate transactions for such times in order to find the best deal.
So what exactly is inflation?
The word inflation in its definition is the rate at which prices rise, or in other words a prolonged decline in the value of the local currency.
Inflation is a situation in which there is a consistent increase in prices, which exceeds the normal growth in the market. Rising prices of goods, products and services that we consume relative to previous years. This increase directly leads to the erosion of our purchasing power or simply – our money loses value and is worth less.
What are the reasons for inflation and what are the ways of dealing with it
The causes of global inflation are numerous and complex and are also influenced by the situation in Ukraine and Russia, and at the same time China, which is reducing its goods exports. The complex political situation in Israel also has a considerable impact.
It is too short to go into the depths of things here, but precisely at a time when global inflation is raising its head, we are also witnessing price increases in real estate markets around the world.
Real estate allows us to improve our financial situation because it, compared to current account money, does not lose value. Indices that examine the increase in prices reveal that there is hardly a Western country that has not experienced increases in property prices in recent times. Market fluctuations and prices are always affected by supply and demand.
In the current situation, demand is very high and supply is low. The banks are trying to fight inflation by raising the interest rate.
Trying to create a situation that will have less money on the market. People will buy less, consume less, in order to create a balance so that the value of money does not erode.
Since Covid-19 until today
Towards the end of 2020 and the beginning of 2021, sharp costs in prices began, rental and housing prices rose drastically, which created high demand. There is currently a shortage of housing units in the US and the UK, as the “bottleneck” created by the coronavirus has created problems and delays in the supply of materials for construction, and the high inflation only aggravates the situation and increases demand.
Some investors were able to adapt their investment strategy to the “new normal” situation, but then discovered that 2022 brought with it a new and disturbing new player, most of whom had never met: inflation.
The Connection between inflation and the real estate markets
SDB has been a player in the real estate market for over 15 years. During our years of activity, we have experienced quite a few upheavals in the capital markets. Based on our experience from past cases in times of declines in the capital market, many investors decide to cash out their money and take out various investment channels (stocks, banks, capital markets, etc.) and transfer them to real estate investments.
In the current situation, it appears that inflation is working in favor of real estate investors abroad.
Rental residential properties are an excellent investment in an inflationary environment and some see such properties as “hedging for inflation”. This is because there is a very high correlation between the increase in inflation rates and the rental market. The higher the price index, the higher the rents are expected to be.
In times of crisis, it is better to purchase in areas of demand and find strong assets. It is necessary to take into account the interest rate increases in business plans in the next two years. It is important to carefully plan your investment strategy, and select highly experienced local partners-managers and together carry out rigorous risk hedging.
With proper planning, real estate investments can cope with rising inflation and interest rates,
and may even protect against them.
Here are some interesting articles on the subject from Forbes and Bloomberg:
Why Income-Generating Real Estate Is The Best Hedge Against Inflation
https://www.forbes.com/sites/forbesbusinesscouncil/2022/04/14/why-income-generating-real-estate-is-the-best-hedge-against-inflation/?sh=3340fc41746f
Real Estate Is Emerging as a Hedge Against Roaring Inflation
https://www.bloomberg.com/news/articles/2022-01-24/is-real-estate-a-good-investment-hedge-against-inflation-what-the-experts-say
