The UK’s inflation rate has posted some of the most significant increases this year since records began. Despite a temporary decline over the last few months, economists expect it to keep rising and predict that it could be well over 4% by 2022.
This trend significantly affects the property market, so explore that in this post.
Why is inflation rising in the UK?
Demand for Energy
The demand for energy (oil and gas) has grown worldwide, leading to a dramatic price increase. The scarcity has led to a rise in domestic heating costs and has also had a significant run-off effect on businesses that need to run heavy equipment, heat their premises, and pay for transportation. These costs are usually passed on to consumers in the form of higher prices.
Employment shortages
Businesses are having trouble recruiting workers to drive lorries and staff to pick and process food. While it is unclear whether this has been the result of Brexit or the COVID pandemic, it makes it more difficult for businesses to meet demand and increase costs.
Supply shortages
There are bottlenecks and shortages regarding the supply of computer chips and building materials. The shortfall in supply has pushed up demand, along with commodity prices.
How inflation affects real estate
Inflation has several direct and indirect effects on the real estate industry. They include;
Increased home construction fees.
Inflation leads to a general price in the materials needed to perform day-to-day activities, like concrete, bricks, and stucco. This trend will increase the cost of home construction, forcing developers to raise the price of new real estate properties. The supply disruption will also increase demand and increase the prices of existing structures.
Increased cost of borrowing
The rapid price increases that accompany inflation will make it difficult to borrow money. The cost of borrowing will be prohibitively high in these situations since deflation will devalue the currency and force most lenders to increase their rates. This response is often meant to cover the losses that arise from a decrease in currency value. However, it has a significant impact on both buyers and real estate developers. Most contractors use borrowed money to finish construction projects. An increase in interest rates will often lead to higher property prices.
Rental rates will increase.
One of the most significant impacts of inflation is an increase in rental rates. It increases the cost of borrowing, thereby forcing most people to abandon mortgages and rent out accommodation. The resulting demand for rental properties and increase in tenants pushes landlords to increase rental rates.
Is real estate a good hedge against inflation?
Real estate is an excellent hedge against inflation for several reasons.
- First, it makes it easier for you to pay off debt. Inflation will lower your loan-to-value ratio over time, thereby reducing your debt burden.
- Your property’s value will increase while your mortgage payment remains the same (assuming you have a fixed-rate mortgage).
- Inflation can also be helpful if you’re earning income from rental properties, especially from assets with short-term lease structures like multi-family apartments, since higher home prices will mean higher rent. If you can increase your rental rates, maintain your mortgage fees, and minimize defaults, you’ll get more money.
Real estate investment strategies for inflation
There are several ways to invest for inflation, as we’ve explained in the sections below.
Buy property
Real estate assets typically appreciate over time, regardless of what is happening in the economy. Their prices also tend to mirror the market (i.e., they rise with inflation). These factors make property investing an excellent way to counter inflation.
Real Estate Investment Trusts.
A real estate investment trust or REIT is a company that owns, manages, or finances profitable commercial real estate. REITs provide natural protection from inflation since rental fees, and property prices increase along with prices. This trend enables REIT dividend growth and creates a reliable income stream during rapid upward price changes.
There are about 6 main REIT types you might want to consider for your investment.
1. Residential REITs
These companies manage and own multi-family rental apartment buildings and manufactured housing units. Residential REITs are most appropriate for long-term investment, as there are several factors that affect their prices over short periods. Economic cycles and interest rates usually counteract these fluctuations in the long term, enabling well-managed REITs to perform really well.
2. Retail REITs
Retail REITs generate income from the rental fees charged to tenants. For this reason, their performance will often mirror the retail sector. They’ll do well when the industry is thriving but suffer when retail businesses suffer low sales, as it may cause them to delay or default on monthly payments.-
3. Office REITs
These companies invest in office buildings. They’re income comes mostly from tenants who have signed long-term leases.
4. Healthcare REITs
These companies invest in real estate infrastructure for medical centers, hospitals, retirement homes, and nursing facilities. They will likely grow more profitable as Britons age and healthcare expenditure continues to grow.
5. Hybrid REITs
Hybrid REITs are a cross between Rental and Equity RETs. They own properties, collect rental fees, and invest in mortgage securities. This approach allows the companies to take a more balanced investment strategy. It enables them to generate profit in both rising and falling interest rate environments where conventional REITs would struggle.
Mutual funds
A mutual fund is a financial instrument comprising a pool of money collected from several individuals to invest in properties, stocks, and other assets. Mutual funds are managed by professional money managers who leverage assets to produce income or capital gains for investors. The mutual fund’s portfolio is maintained ad structured to attain the investors’ objectives, as specified in a prospectus.
There are about three ways to earn money from a mutual fund.
- Whenever the fund sells assets that have appreciated, the fund has a capital gain. Most funds will pass these earnings on to investors in accordance with a pre-determined distribution.
- You’ll earn income from dividends on stocks and interest bonds held in the fund’s portfolio. You may be given the choice of receiving a check or reinvesting your earnings in exchange for more shares.
- If a fund’s assets gain value but remain unsold, the shares will increase in price, and you can sell them for a profit in the market.
Conclusion
Real estate investing is one of the best ways to grow your income and protect your money from market risks like inflation. While it takes some effort to get started, the results, i.e., passive income, financial security, and so on, are more than worth it.
If you’d love to start property investing, we’re here to help! We’ve got a team of experienced property investors who’ll help you buy your first real estate asset and make other profitable investments. You can join us today by signing up at the momentum academy.
