Real estate offers inflation protection! Is that true?

The already mentioned study also states that in 1st place, most Germans, with 47% of respondents, see saving on a current account as an investment option. Which, of course, does not protect against inflation given the current situation.

In the case of real estate, residential property differs as a capital investment or as a residential property that is occupied by yourself.
For residential properties, the Own use for 47% the Germans in the foreground. In addition, there are also opportunities to use commercial or residential real estate as a capital investment and benefit from rental income. Or to invest in real estate funds or real estate projects that can generate regular returns.

Regardless of the type of investment chosen, real estate is considered inflation protection because, in contrast to many other investments, it has a high intrinsic value — this includes, for example, the material value of the building structure and the value of the location.

What speaks against real estate as inflation protection?

In principle, inflation protection means that the annual return that investors or owners achieve with a property is higher on average than the inflation rate — which is currently around five percent in Germany. However, the performance of real estate is by no means set in stone, but depends on numerous, sometimes unpredictable factors. These include, for example, individual false expectations regarding market development and partly interest-based studies, which are financed directly or indirectly by companies and banks.

Studies on real estate price developments, for example, are often based on data from expert committees. However, these do not record individual object data, but only the number of transactions, the value and the sum of the areas traded. The average values calculated from this therefore say nothing about actual real estate prices. If, for example, a particularly large number of expensive properties are traded in a year, this pulls up the average prices.

On the basis of the smoothed data alone, it is not possible to say unequivocally how well real estate actually offsets inflation. In addition, unforeseeable events such as the 2008/2009 financial crisis may mean that market participants' return expectations are not met. The bursting of the real estate bubble — caused by the reckless granting of loans in the USA and the bankruptcy of investment bank Lehmen Brothers — was considered a trigger for the global financial and banking crisis. During the peak of the recession, the real estate markets in many countries plummeted by double digits, in some cases because heavily indebted investors were forced to make emergency sales.

Following the financial crisis, low interest rates, cheap loans and the long-lasting economic upturn have led to the There was a boom in the real estate market that even withstood the corona pandemic. The prices for residential properties in Germany are 3rd quarter of 2021 by an average of twelve percent increased compared to the same quarter of the previous year. For the second time in a row, this was the biggest price increase in residential real estate transactions since the start of the time series in 2000 — and clearly exceeded the German inflation rate of around three percent at the time.

Whether the massive rise in real estate prices in recent years could result in another bubble formation is currently being discussed controversial. But even if this is not the case, there are numerous factors that can reduce the value of real estate as an inflation hedge:

Owner-occupied real estate

Paying the purchase price, ancillary purchase costs and any loan obligations is not enough. Property owners incur other regular costs, such as property tax, operating costs, maintenance measures and insurance, which reduce potential returns.

In addition, owner-occupied real estate as an illiquid asset class does not generate any current income. Homeowners must therefore either hope for an increase in value in the event of a sale or be content with the fact that their capital is at least spared the current penalty interest rates at the bank. Whether the increase in the value of a property is Expected inflation of 4.9% in 2022 can compensate, is likely to depend significantly on their condition, situation and demand.

Rented properties

Properties used by others pose another major risk: rent losses, which have increased sharply due to the corona pandemic. After 2.1% in 2015 gave In 2021, around 7% of tenants say they will no longer be able to pay their rent due to the corona crisis. It can be assumed that outages will continue to increase. For example, 17.6% of the tenants surveyed have not yet been able to estimate whether they can continue to pay their rent. In addition, inflation also increases the costs of ancillary real estate and maintenance costs.

What is the case for real estate as inflation protection?

However, landlords can benefit from real estate as an inflation hedge due to regular income and tax benefits. Expenses relating to the rented property, such as debt interest or renovation costs, can be deducted as advertising costs. If this results in a loss, this is offset against other income.

Real estate with indexed rental contracts is particularly important when it comes to inflation protection. Tenants and landlords agree to regularly adjust rent to the development of the consumer price index.

Inflation security depends on the individual case

The extent to which a real estate investment actually pays off as an inflation hedge depends on the individual case. In principle, owner-occupied and well-preserved real estate in particular is considered inflation-proof; inflation security can be more difficult when it comes to real estate in need of renovation.

In order for real estate to effectively serve as inflation protection, there are a few basic things to consider. Since the value of a property is not self-evident, buyers and investors should pay close attention to the price, location, type of use, infrastructure and quality. If a high-quality property is in an attractive location, an investment can be worthwhile in the long term due to the very likely rise in rental and purchase prices. Be it as a private home, rented property or as a digital Real asset investment as part of portfolio diversification.