Inflation has made a comeback between the highs and lows of the pandemic and the ongoing war. Over the past two months, the country has witnessed a jump of seven per cent in inflation. Given the growing cost of living, where people carefully evaluate returns on investments, the real estate industry faces a critical question – What does this mean for investment in real estate?
The most appropriate answer to this question is that even with a spike in inflation, it is easy to state that the overall rise in the value of your property will outperform your expectations. Inflation is a part of a modern market economy, and intelligent investors hedge their bets on exceeding assets, irrespective of inflationary pressure. According to a report published by a research Group, titled “India Real Estate Market: Industry Trends, Share, Size, Growth, Opportunity and Forecast 2022-2027”, the Indian real estate market is expected to rise at a CAGR of 9.60 per cent between 2022-2027. There is a latent demand for affordable housing in India, which would primarily escalate the request. In addition, we are witnessing a massive investment by the government in building roads, rail and air, which will catalyze the overall Indian real estate market.
Real estate has always been considered a safe investment in India, and no amount of uncertainty due to inflation can even remotely put pressure on its value. Therefore, it is still considered the most feasible option compared to other investment options. Moreover, unlike other investment options, the owner can shape the return of their investment rather than a bank deciding for you. Not to forget the tax benefits a person can receive through real estate ownership. Historically speaking, real estate returns have outperformed the returns received from other asset classes.
Inflationary periods usually correspond with higher mortgage rates, increased cost of materials and the rising cost of borrowing. These can temporarily slow down the growth but cannot stop it. The Indian market still has the potential to bet all the odds and take advantage of its undervaluation so far. Hence, the V-shaped recovery predicted at the beginning of 2022 will undoubtedly be achieved.
This confidence in growth comes from the fact that Indian real estate is becoming technologically advanced at every step, which would bring down the operational cost. Willful integration of machine learning, data and artificial intelligence are solving problems before they can arrive. The Indian real estate market is also being seen in great regard by foreign investors, and with government initiatives, this investment will also only increase. Compared to potential, inflation is losing this race by a long shot.
Rather than if or should, the question should be when. When should I invest in real estate? The answer to that question is always – right now. The appreciation of your property rates will offset the effects of inflation for you. While it might seem so in your day-to-day routine, many years of holding and maintaining that asset would only give you benefits in the future. Historically Real estate is usually seen as an inflation hedge. As the purchasing power of money comes down, real estate protects investors against that.
While economists’ debate whether the efforts of this spike in inflation are permanent or temporary, commercial property developers can be confident that their assets provide them with the necessary protection. There have been multiple studies done over the last few decades showing that private real estate returns hold steady during inflationary periods.
The only risk of inflation is the actual rent; property owners will increase the rent to handle growing inflation or take a loss. As inflation results in higher interest rates which results in higher cost of borrowing and higher operating expenditures, sometimes it may take more time to increase rent than pass over the higher costs down to the tenant.
Investors should consider investing in properties with good cash flow rather than lazy equity. The benefits of investing in real estate right now outweigh the drawbacks. Also, during times of high inflation, property owners/managers will incorporate rent increases into their lease documentation, something called escalation clauses. The clauses are either directly linked to inflation or have a number higher than normal escalation clauses in a normal environment.
With the answer “always – right now” and in summary, real estate provides an excellent hedge against inflation and generally most investors will agree that real estate as an asset class is immune to the harmful effect of inflation.
Source: timesofindia.indiatimes.com