Increase in inflation | Should you invest in the property market
Inflation has made a comeback amid the ups and downs of the pandemic and the ongoing war. In the last two months, the country has seen an increase of 7% in inflation. Given the rising cost of living, where people carefully evaluate the return on investment and invest in the property market are faced with an important question – what does this mean for investing in the property market?
The most appropriate answer to this question is that even with an increase in inflation, it is easy to say that the overall increase 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 more than just assets, despite inflationary pressures.
According to a report published by IMARC Group, titled “India Real Estate Market: Industry Trends, Share, Size, Growth, Opportunity and Forecast 2022-2027”, the Indian real estate market is expected to grow at a CAGR of 9.60% between Rs. 2022-2027. There is a hidden demand for affordable housing in India, which will primarily drive the request. In addition, we are witnessing massive investment by the government in road, rail and air construction, which will catalyze the overall Indian real estate market.
Real estate in India has always been considered a safe investment, and no amount of uncertainty due to inflation can even remotely put pressure on its value. Hence, it is still considered the most viable option as compared to other investment options.
Also, unlike other investment options, the owner can shape the return of his investment, rather than the bank deciding for you. One should not forget the tax benefits that a person can get through real estate ownership. Historically speaking, real estate returns have outperformed returns from other asset classes.
Periods of inflation are usually in line with higher mortgage rates, increased material costs, and rising borrowing costs. These can temporarily slow growth but cannot stop it. The Indian market still has the potential to bet on all odds and take advantage of its hitherto low valuations. Therefore, the V-shaped recovery predicted in early 2022 will undoubtedly be achieved.
This confidence in growth comes from the fact that Indian real estate is getting technologically advanced at every step, which will bring down operating costs. The willful integration of machine learning, data, and artificial intelligence is solving problems before they even come. The Indian real estate market is also being viewed in great esteem by foreign investors, and with the government’s initiatives, this investment too will only increase. Compared to capacity, inflation is losing the race by a long shot.
Instead of if or should the question should be when. When should I invest in real estate? The answer to that question is always – now. An increase in the rates of your commercial property will offset the effects of inflation for you.
While it may seem like it is in your day-to-day routine, many years of owning and maintaining that asset will only benefit you in the future. Historically, real estate has generally been viewed as an inflation hedge. As the purchasing power of money decreases, real estate protects investors from this.
While economists debate whether this increase in inflation efforts is permanent or temporary, commercial property developers can be confident that their assets provide the protection they need. Several studies have been conducted over the past few decades that show that private real estate returns remain stable during periods of inflation.
The only risk to inflation is the actual rent; Property owners will increase the rent to handle the rising inflation or to bear the loss. Since inflation results in higher interest rates, resulting in higher borrowing costs and higher operating expenses, it can sometimes take longer to raise rents, which incurs more costs to the tenant.
Investors should consider investing in property market, assets with good cash flow instead of sluggish equities. The benefits of investing in real estate right now outweigh the drawbacks. During times of high inflation, property owners/managers will include an increase in rent in their lease document, called an escalation clause. Clauses are either directly linked to inflation or have a higher number of normal escalation clauses in the normal environment.
In short, real estate provides an excellent hedge against inflation, and in general, most investors would agree that investing in property market as an asset class is immune from the damaging effects of inflation.