Inflation protection through residential real estate

Inflation is back. It is not yet clear how long this situation will last. However, due to the clear signals from the economy and monetary policy, many investors are preparing for a longer period. They are changing their investment strategy and increasing their investments in assets with higher inflation protection. The favorite – due to its many advantages – is clearly residential real estate. But there are also other forms of investment that are important and make sense in the current fiscal situation, especially for institutional investors.

Facing inflation in the medium term

The European Central Bank (ECB) recently sent out clear signals. It has changed its inflation target from “below but close to two percent” to two percent in the medium term. In general, it can be assumed that central banks will tolerate higher prices than in the past, as there is no political scope for countermeasures. The risk would be too great of sabotaging the budding recovery and, as a result, no longer being able to cope with the debt burden.

Current inflation rates at almost four percent

What the chief economists of renowned banking houses predicted more than a year ago – and also see for the future in the medium term – has become reality: We are talking about inflation rates well above two percent. In May and June, they were 2.5 and 2.3 percent respectively in Germany. According to the Federal Statistical Office, inflation in July 2021 was +3.8%.

Asset classes with inflation protection in demand

Current developments are forcing investors to rethink their investment strategy all the more. In addition to the challenges posed by investment pressure, zero interest rates, a shortage of supply and the constant imposition of new requirements, they must now increasingly focus on asset classes that offer the greatest possible protection against real loss in value due to higher inflation.

Does real estate offer the greatest inflation protection?

Historically, the asset classes real estate, equities and commodities have offered the best protection against inflation. However, the latter are only suitable for certain investors due to their higher risk profile. In any case, strong attention must be paid to the selection.

Which properties offer returns despite inflation?

Experienced investors are currently focusing on residential real estate in combination with active asset management and investments in corresponding real estate funds. They have proven to be an extremely solid capital investment, and not just during the Corona pandemic. This is because residential real estate in selected locations offers inflation protection, sustainable income and solid distribution yields in conjunction with interesting potential for value appreciation.

Measured by the rental price index, residential rents in Germany have moved roughly in sync with the consumer price index since 2005. So as inflation rises, so does rental income. In addition, certain properties not only offer secure long-term rental income, but also the potential to increase returns through renovation, repositioning or conversion.

Achieving steady returns above inflation with residential real estate

With this approach, steady returns can be achieved that are above the level of inflation. In Western Europe, for example, 3 to 5 percent annually is possible through long-term rental income. – While most federal bonds yield negative interest.

No alternative at present: a large share of residential real estate in the portfolio

In general, it should be noted: Real estate does not offer a guaranteed hedge against inflation. After all, there is no guarantee here either. Compared with the other asset classes, however, they offer some of the best protection against inflation – especially for institutional investors – while at the same time offering promising return potentials. Residential real estate and real estate funds in particular, which have a correspondingly attractive, solid and developable portfolio, are clearly to be given priority in asset allocation in times such as these.

Nox Capital offers institutional as well as semi-professional investors real estate and real estate funds with which they can hedge against inflation risks and generate solid long-term yields as well as value appreciation. Our (inflation) experienced real estate specialists are always at your disposal in these challenging times.