The OECD recently officially announced that Europe is headed toward an economic downturn, but, truth be told, we have been feeling this for a long time. As our money is, slowly but steadily, losing its value, and many big companies are firing employees en masse, you just can’t ignore the macro effect of the war in Ukraine and the long-term after-effects of the COVID crisis. Real estate investors, of course, are likely to be highly affected by this recession, too. However, I believe that with a proper understanding of the situation, they can channel this crisis to their benefit.
My name is Ofir Bar, a veteran real estate investor with over 20 years of experience in markets all around the world. Inflation is already here, and it has been on my mind for quite some time. I asked myself how I can make the best of it - and this blog post is the result. If you ask me, an inflationary phase can be disastrous for investors, but it doesn’t have to be. In this post, I’ll give real estate investors some knowledge and tips on how to survive (and maybe even thrive) in these difficult times.
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The two axles
Real estate assets change their prices in accordance with two axles: value (which is determined by demand), and the local currency’s rate. During inflation periods, banks are naturally less willing to give loans. Moreover, they increase the interest rate on loans they give. By doing so, prices naturally go up. As a result, people are less likely to purchase properties. Of course, everyone needs a place to live. This means that the demand for assets for rent will greatly surge, which will eventually lead to higher rent prices - a golden opportunity for real estate investors.
Banks’ strictness in inflationary times, though, affects not only renters but also potential buyers. Unless you are a well-established real estate investor, don’t expect your bank to let you take a loan so easily. And, just like for people who wish to buy an asset to live in, in recession times, banks offer loans with high interest to investors, too.
Don’t forget that during inflation, not only housing prices are on the rise. Concrete and other materials and tools needed for construction also become more expensive. Obviously, this may deter many investors from investing in new projects, especially if they are still in the construction phase. With that said, this is good news for those who enter the inflationary phase with several assets: If other investors are less likely to own more new properties, they have less competition over each new apartment.
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The great hedge
By and large, before purchasing any assets for investment, investors ought to examine each property as an individual case. After all, different assets can be subject to different variables. Physical location, surroundings, and the effects of the local market are just a few of them. With that said, there are some general guidelines that can help you navigate the rough waters of investing in inflationary times.
As can be understood from what I’ve written so far, residential real estate for rent is considered a great hedge against inflation, but this is not all. An inflationary phase is a good window of opportunity to purchase commercial assets for rental. Multi-unit and single-family homes may also produce higher than normal returns on investments. As a matter of fact, during times of rapid inflation, it’s often more worthwhile to be a real estate investor than a stocks or bonds investor. Remember that in these kinds of economically volatile times, it’s especially important to invest in varied assets.
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Be stronger than your fears
Inflationary time periods are a great challenge for real estate investors. However, it’s not out of your reach to overcome this crisis with the upper hand. It’s mainly a matter of preparation, restraint, and confidence in yourself and your abilities. So, never act in panic. Another tip I can give you is to embrace the power of not acting. Sometimes, it’s just better to sit tight and let things happen before you make a big call. Doing this without feeling the FOMO definitely implies a real estate investor that is stronger than the sum of his fears.