This is bad news for consumers and, combined with tax hikes, means that households are facing the biggest drop in living standards on record. But that’s not good news for investors either.
Traditionally, stocks are considered a hedge against inflation. At best, however, the rising cost of living means more volatility in stock markets. Typically, high material and borrowing costs combined with declining consumer disposable income weigh on business results. For fixed rate investments, rising interest rates will not be enough to help savers keep pace with rising prices.
However, there is one asset class that seems to ignore inflation: real estate.
According to Nationwide’s index, house prices in the UK have risen 20% since the start of the pandemic, and in the year to the end of February they rose by 12.6% . Rival construction company Halifax saw prices that month rise at their fastest pace in 15 years – even as inflation soared – growing eight times faster than a year ago.
Home builders are optimistic. Bellway, one of Britain’s largest, recently announced that its operating margin had increased over the past year. As its chief executive explained, construction costs are rising, but housing prices are rising even faster.
Popularize the property
Generally speaking, real estate has long been a natural hedge against inflation. Buy-to-let tends to be particularly popular in times of rising prices, for example. Importantly, it is uncorrelated to other assets, such as stocks, and unlike gold, it is an asset class that most of us understand and are familiar with.
After all, many already pay for properties monthly through a mortgage. It is tradable and transparent (unlike private corporate investments) and it is easy for anyone to research sales values and know exactly what they are investing in.
However, that’s not to say there aren’t tough challenges with real estate investing. The entry price for direct investments is high, with investors having to commit tens or even hundreds of thousands. Likewise, liquidity is an issue – the property can take time to sell. Finally, it is largely unregulated, lacking the safeguards of traditional investment funds and savings accounts.
Alternative methods of development finance remove or mitigate many of these barriers to the democratization of real estate investment.
A crowdfunding-based model allows investors to pool their resources to support loans that few could afford or want to undertake on their own, or individuals can contribute a smaller amount to multiple developments, thereby diversifying their portfolio of investment.
Second, borrowing at a relatively low loan-to-value ratio can provide increased protection against any short-term declines in property values, while providing exposure to the benefits of rising house prices. If the loan defaults, the first port of call is the asset – the property itself. Additionally, the use of relatively short-term loans – such as those from Estateguru which are 18 months on average – offer a shorter investment horizon if an investor does not wish to commit to the long term.
Increasingly, platforms that provide this type of investment are controlled and closely monitored by relevant regulatory bodies in the jurisdictions from which they operate. Estateguru, for example, requires FCA approval before starting operations in the UK. Platforms seeking approval must demonstrate a strong business plan, good governance arrangements and operational control in terms of assessing borrower creditworthiness.
Of course, it’s always up to investors to do their due diligence. Any investment involves risk, and nothing is truly as “safe as houses”. Perhaps not surprisingly, however, real estate investing is undoubtedly approaching.
*Judith Tan is Head of Capital Markets at EstateGuru