As we face inflation on the horizon and economically uncertain times, what type of asset class could hedge rising inflation is a question every investor would have at the front of their mind right now. At One UK Properties, we want to help you understand why inflation is an investors friend and how you can use it to your advantage.
Under most circumstances, an inflationary environment leads to higher rents and higher property prices. Owning residential real estate is considered to be a great hedge against inflation due to three reasons:
Inflation benefits real estate investors who are earning income from their rental properties, specifically property sectors with one-year tenancies like multi-family properties such as apartments, because higher home prices often equal higher rent. If you’re able to adjust your rent up while taking into consideration a 3% yearly inflation, this can create the opportunity for increased money in your pocket.
Property values over time tend to stay on a steady upward trajectory. Most of the properties that lost value when the real estate bubble burst in 2008 were back to their pre-crash prices in less than a decade. This means they can keep pace or exceed inflation in terms of appreciation.
The effect of inflation on debt is that it decreases it over time. As a property price rises over time, it lowers the loan-to-value of any mortgage debt, acting effectively as a discount. As a result, the equity on the property increases, but your fixed-rate mortgage payments remain the same.
That said, investors need to be wary of high-inflation environments, primarily because the cost of borrowing will increase, putting downward pressure on your cash flows and demand for real estate if you want to liquidate. It also makes new real estate development more costly.
With more positives than drawbacks, UK residential real estate in an inflationary environment is a real opportunity for real estate investors to hedge if they make smart acquisitions.
Please contact us for further information on properties in areas of higher appreciation and higher rental yield.