As inflation rates continue to upsurge, investors are looking for ways to protect their wealth from its impact. Real estate has long been considered a safe haven for investors during times of inflation, and this trend is expected to remain in the UK.
According to the Office for National Statistics, UK inflation rose to a 10-year high of 5.1% in November 2021. As inflation erodes the purchasing power of cash, investors holding significant cash positions risk losing value over time. On the other hand, investing in real estate can provide a hedge against inflation by providing a steady stream of income and the potential for capital appreciation. According to the Bank of England, UK house prices have risen by an average of 9% per year since 1975, well above the long-term average rate of inflation of around 2%. This suggests that real estate has historically been an effective inflation hedge.
Real estate is a tangible asset that can provide a steadfast income stream, even during inflationary periods. Rental income from real estate investments can be adjusted to keep pace with inflation, permitting investors to maintain their purchasing power over time. According to the UK House Price Index, the average house price in the UK increased by 10.2% in the year to September 2021. This growth is anticipated to continue as demand for housing outstrips supply.
In a recent survey of UK institutional investors by CBRE, 56% of respondents said that they regarded real estate as an effective inflation hedge, up from 36% in the previous year’s survey. The same CBRE survey found that 66% of respondents planned to increase their allocations to real estate in the coming year, with the majority citing inflation protection as a key reason.
The supply-demand imbalance is probable to push prices even higher in the coming years, providing an opportunity for investors to profit from capital appreciation. According to data from the Investment Property Databank (IPD), UK commercial property has delivered an average annual return of 7.6% above inflation over the past 20 years. This outperforms many other asset classes that are often well-thought-out inflation hedges, such as gold and inflation-linked bonds.
Real estate investment trusts (REITs) offer another way for investors to gain exposure to the real estate market. REITs are companies that own and operate income-generating real estate properties. By investing in REITs, investors can gain exposure to the real estate market without the need for significant capital outlay or the burden of property management. REITs can provide a steady stream of income, as they are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
In conclusion, real estate has historically been an effective hedge against inflation in the UK. Real estate provides a steadfast income stream and the potential for capital appreciation, making it an attractive investment option for investors looking to shield their wealth from the eroding effects of inflation. As inflation rates continue to rise, investors are likely to turn to real estate as a safe haven for their wealth.