How to invest in real estate for capital preservation in an inflationary environment?

The law of zero return

In today's financial world, there is a concept known as the “law of zero dewey returns,” which states that investment returns are often offset by inflation and tax deductions, resulting in a useful financial outcome of zero. According to Ilya Bitkov, a real estate expert at Coldwell Banker, many investors choose to invest not to increase their capital but to preserve it, as financial wealth quickly loses value.

Real estate investments

The question is how can those who want to not only preserve their savings, but also increase them, find the best investment solutions? Why do many experts believe that investing in real estate may be the ideal choice in this situation?

As inflation increases, experts recommend paying attention to investments in real estate, as well as precious metals, while the value of such traditional assets as stocks and bonds is significantly decreasing. Georgy Kachmazov, manager of one of the companies, emphasizes that in the past people sought to maximize profits from their investments, whereas today the focus is shifting towards capital preservation.

Investment risks

Many people do not understand how to do this at all, as keeping funds in currency involves risks, such as the possibility of devaluation. Among all possible investment options - stocks, gold, bank deposits and management funds - real estate is rightly considered the most reliable and attractive asset.

Inflation protection

To protect your savings from the effects of inflation, you should not rely too much on gold - its value showed a sharp decline in 2013, falling by almost 30%. In addition, holding funds in equities alone can be very risky due to their volatility. The most sensible move is to invest in liquid real estate in a rising market. Note that such investments may not yield excessive returns, but will grow in value, protecting cash from depreciation.

Customer dissatisfaction

Ilya Bitkov also noticed that among his clients in hard times there is often dissatisfaction with different investment strategies, stocks and brokers or insurance advisors who may have recommended certain financial products.

Many are dissatisfied with low interest rates on bank deposits and “investments” in pension funds that do not live up to expectations. It is important to realize that changes in the economy on a global level necessarily affect stock markets and other areas of business.

Benefits of real estate

Despite all sorts of risks of economic downturns, real estate holds a stable position in times of instability. Unlike financial instruments that can quickly lose value, real estate remains a real and tangible asset. It offers opportunities for income generation, such as rental income, which makes it particularly attractive in times of uncertainty for investors seeking to preserve and grow their assets.

Conclusion

Investing in real estate allows you to not only protect yourself from inflation, but also potentially earn money, which is extremely important in the current economic realities. As a result, when deciding to invest, it is safe to say that the real estate market offers prospects for stability and potential growth of personal capital.

Positive aspects of investing in real estate

Roman Grigoriev, who is the head of Longrad, highlights many positive aspects associated with investing in real estate. He emphasizes that this type of asset provides a stable income, has relatively low risks and gives the opportunity to increase its value through the improvement of the object.

In contrast, pledging real estate with a bank is not a complicated process, and its price stability is much higher than that of stocks or precious metals. Investors thus have a chance to adapt to market changes.

Dynamics of housing prices in London

If we analyze the change in London house prices in pounds sterling and gold prices in dollars per ounce from 1973 to 2013, data collected from sources such as MeasuringWorth.com and Nationwide can be used for analysis. In 1973, the average price of a residential property in London was £12,848, and if an investor had purchased an apartment for that amount 40 years ago, its price would have risen to £345,186 by the end of 2013.

• The value of this property has therefore increased by an impressive £332,332,338.
• This corresponds to an almost 27-fold increase.

While gold has only appreciated 14.5 times over the same period, real estate rental income has far outperformed gold's returns.

The role of real capital gains

Real capital growth is an important aspect for those who invest in real estate. As Alice argued in Lewis Carroll's work:“Sometimes you have to run to stay put.”. An investor could restate this dictum:“We need to strive to get ahead of the curve without fatigue.”.

Illustration of real capital gains

To illustrate, let's take a concrete example: Turkey experienced a 12.5% increase in real estate prices between the second quarter of 2012 and the second quarter of 2013. A lot of people were discussing the active development of the housing market at that time. However, given the high inflation rate of 7.5%, the actual increase was only 5%.

The situation becomes especially serious when inflation outstrips price growth, as is the case in today's Russia.

State of the real estate market in Russia

According to the federal portal “Apartment World”, the secondary real estate market in Russia saw only a 2.1% price increase in 2013, while the inflation rate was 5.3%. This indicates that in reality housing in Russia has become less valuable by 3.2%.

Dynamics of real estate prices and inflation rate in 2013 are as follows: information provided by Knight Frank and other research organizations.

Conclusions on real estate investments

By studying price changes and inflation rates in various countries, one can conclude that the best way to provide real capital is to rent out real estate rather than simply hoping for a general increase in sales prices.

In the context of rising prices that lead to inflation of, for example, 3% per year, when real costs increase by 5%, the tangible capital gain is only 2%. Nevertheless, if an investor chooses the option of renting out real estate, he can count on an additional 4-5% income per year.

That said, it's important to realize that rents are better fixed in currencies that are more resistant to inflationary fluctuations. Between 1973 and 2013, the dollar lost an average of 4.3% in value annually, while the pound sterling depreciated by 6.1%. It is important to note that the ruble experienced an average inflation rate of 181% from 1991 to 2013, with 1992 being a particularly difficult year, with prices for consumers rising by 2508.8% in one year.

How to ensure capital growth above inflation

To secure capital that will grow faster than inflation, it is wise to invest in properties that are undervalued, as well as properties that can be significantly increased in value with thoughtful and economically sound renovations.

Investments in commercial real estate

Investment in office leases is often affected by changes related to inflation. This aspect implies that commercial real estate properties are able to respond to inflationary processes, even when entering into long-term lease agreements.

If we carefully analyze different types of real estate, we find that hotel rooms, retail space, industrial space and short-term rental apartments prove to be the most susceptible to these fluctuations. Office space and real estate investment trusts (REITs) show a medium level of sensitivity to inflation, while land and long-term rental apartments, unlike the others, hardly react to inflationary changes.

Risks of investing in land plots

Nevertheless, it is important to remember that investing in land plots can be quite complicated. According to specialist Ilya Bitkov, such an area carries a lot of risks:

• Cost estimation
• Availability of necessary communications
• Regulation of land use

It is for these reasons that this market is considered less attractive for novice investors.

Commercial real estate analysis

Commercial real estate requires in-depth analysis, significant financial resources and time expenditures. Foreign investors seeking commercial real estate loans will face a number of challenges. In contrast, investing in residential properties is a simpler route that can cover both primary and secondary markets.

Experts recommend paying attention to multifamily rental properties to reduce the risk of financial loss.

Investments in REITs

To protect your assets from depreciation due to inflation, it is wise to consider investing in REITs. Usually, the profitability of such funds can exceed the inflation rate, which allows investors to not only preserve their money, but also multiply it. According to Ilya Bitkov, the average rate of return of large funds:

• Under ideal conditions can reach 6-8% per year.
• These figures may vary depending on different market segments.

Historic REIT yields

Notably, in the United States, from 1973 to 2012, average returns, according to the National Association of Real Estate Investment Trusts (NAREIT), exceeded 11%. In some years, such as 1975, 1976, 1979, 1982, 1982, 1991, 1996, 2003, 2004 and 2006, returns were even above 30%.

As a result, the average inflation-adjusted return for NAREITs was over 7%, given that the inflation rate averaged 4.3%. The data demonstrates that despite the lack of direct control over their REIT investments, such funds have maintained their liquidity in an economic downturn.

Investment recommendations

According to the recommendations of experts, it is extremely important to channel your financial resources into real estate, which will help protect capital from inflationary risks.If so, it can be a serious tool for achieving long-term financial stability and improving asset returns.

Conclusion

In conclusion, after a thorough analysis of the presented data and expert opinions, it can be stated that real estate investments are indeed one of the most reliable ways to protect capital in conditions of uncertainty and inflation. The situation on the financial markets can change with the clock, and even the strongest securities can lose value in an instant.

While real estate, as an asset, has internal resilience, serving not only as a protection against inflation, but also as a source of stable income.

Advantages of investing in real estate

• Regular income:Real estate provides the opportunity to receive rental payments, which creates a steady cash flow.
• Risk reduction:Real estate investments are less susceptible to sudden changes than stocks and other securities.
• Opportunity to improve the facility:Investors can increase the value of their assets through repairs and improvements.
• Liquidity:The property can be used as collateral for a loan.

Importantly, real estate offers investors the opportunity to create real added value through renting, improving or reselling. Clear examples of rising housing values, as seen in London, confirm that investing in this sector can add value in the long term.

Real capital growth

The key point is also that understanding real capital gains and properly assessing risks forces investors to make informed decisions. While in the past many were chasing high returns, in the current environment it is clear that it is more important to preserve and grow the capital you already have.

Indeed, the above examples demonstrate that for successful real estate investing it is necessary to take into account not only nominal price growth, but also the inflation rate, which will directly affect the real yield.

Conclusion

Thus, real estate turns out to be an effective tool to protect assets from inflation and economic crises. Investing in this sphere is not only a step towards financial independence, but also a way to provide your family with a stable income and security.

I am convinced that competent investors seeking effective management of their capital should consider real estate as an important element of their investment portfolio. It is real estate that will remain a reliable pillar, capable of bringing both moral satisfaction and financial stability in the face of fluctuating economic conditions.