Why real estate investing makes sense in times of high inflation



Inflation is a buzzword right now, with the cost of living rising at an extraordinary rate. The Consumer Price Index, a measure of inflation, rose 5.5% in the 12 months to January, its highest level in three decades, according to the Office for National Statistics. .

Homeowners aren’t immune to worries about inflation, but while it can impact the profitability of life as a homeowner, our research suggests it only adds to the appeal of real estate investment.

Rising costs

We recently polled hundreds of real estate investors on how they think the current inflationary environment will affect their own portfolios.

And it was striking how aware they were of the dangers ahead. More than four in five respondents (83%) say they are worried or very worried that rising inflation will have a negative impact on their ability to continue to invest profitably in the rental market.

There were certain areas of spending that investors frequently singled out as particularly sensitive to inflationary pressures. For example, it’s no secret that energy bills are becoming a growing concern for everyone in the UK, whether you’re a homeowner, investor or tenant. We’ve already seen the energy price cap hit a new all-time high, meaning the average home will see its bills rise by £700, with the likelihood of further substantial increases to come.

Similarly, mortgage costs are also expected to increase. The banks’ base rate has increased twice in the past three months, with hopes that there will be more increases to come. In fact, the markets have forecast two more for this year, with the base rate likely to top 2% in 12 months. For investors who have taken advantage of historically low trailing rates, these increases would lead to significantly more expensive mortgage repayments.

decide to do nothing

You would think that such a scenario would cause some owners to think twice about their investments, to consider reducing the size of their portfolio. However, this does not ring true for most investors.

Our study revealed that only 29% intend to reduce their activity while inflation is high. In contrast, a quarter intend to increase their investment activity while another third choose to do nothing. Deciding to do nothing is in itself an active choice, of course – these investors are comfortable with the prospects of their real estate investments over the long term, and not just when inflation is high.

Bricks and mortar safety

This confidence is well founded. Ultimately, real estate only becomes a less attractive option if investors can find better anti-inflation yield from other assets. That certainly won’t happen if you opt for a standard savings account, when the stock market can be incredibly turbulent. Sure, you might get lucky and identify stocks on the rise, but a few bad decisions can make you worse off.

By contrast, the outlook for the housing market remains extremely strong. There is an underlying housing shortage in the UK ‒ Propertymark, the body for estate agents, recently reported that the average estate agents had 100 potential buyers on their books, but only 19 properties, a record.

This imbalance not only means that landlords who invest in the right areas will have a steady stream of tenants to whom they can rent, but also that the value of their investments will continue to increase. Although no one expects price growth of the magnitude we saw last year – 10.8% year on year to December according to the ONS – the fact that demand continues to eclipsing supply so significantly means that healthy price growth is anything but certain.

In addition, the growth in rents will help reduce the increase in maintenance costs for landlords. Rightmove reported that rents were rising at the fastest rate on record, up nearly 10% on that point a year ago. The best landlords don’t just raise rents whenever the opportunity arises, but also, this is a time when some will raise what they charge.

There is no doubt that inflation, especially at the level we are currently experiencing, can have a negative impact on the immediate profitability of a real estate investment. However, professional investors rarely take such a short-term view, instead focusing on the longer-term prospects of the property they are buying. And on that front, bricks and mortar remains one of the most impressive assets there is.