The Real Estate Market as an Inflation Hedge


Real estate has always been one of the top investment opportunities and represented a core investment for many institutional investors and pension funds, but has often been underestimated by many private investors.

Some of the best investments are those that make sense over time, not necessarily with the fastest return. This is why it can be advantageous to look at real estate in Switzerland and throughout Europe.

The reason for purchasing in Europe is because real estate could also considered as an inflation hedge. It is one of the alternative investments that can be covered because there is protection provided against the massive increase in Central Banks quantitative easing and/or currency's decreased value.

Some of the best investments are those that make sense over time

The best example is the EPRA Index (the European Property Index representing the traded real estate stocks in Europe): it is up 11% year to date and had an important move in price and volume on the 20th of January, when the ECB announced its QE program.

It is logic to consider that in an environment of very low interest rates (and negative in CHF) coupled with a massive increase in the money supply (M2), governments and central banks are willing to convince investors & institutions to inject money back into the economy. If and when the equity allocation is already at a high level, what alternative do you have? Tangible assets and real estate, of course.

Here is where inflation hedge can make a lot of sense: investing in real estate because it is expected to increase in value over a certain period of time, but also because, but also because it offers a better protection (and a better yield) than an Investment Grade bond.

How much you are going to allocate in real estate ?

Many investors are looking at real estate in Europe as a tactical investment because there is the factor of currency value (the Euro has weakened against most currencies), because the price per square meter is still acceptable (at the exception of Paris or London, eventually), because financing the purchase is historically cheap and because if the European economy keeps recovering, the demand for commercial or residential space will increase: hence, investing in the real estate market can work to someone's advantage.

The question is, when you are involved with portfolio construction, how much you are going to allocate in real estate.

Asset allocation can be one of the most complicated aspects of building a portfolio. Much of it is going to depend on whether you are looking for short term or long term investments.

The other question is how you will invest in the sector: through listed stocks, funds or ETF's and consider it as a tactical investment? Or by purchasing directly the asset and consider it as a strategic investment that will be held for a longer period?

Understanding the opportunities is critical

A direct investment in real estate needs to be considered, normally, as a strategic investment. Yet, there are also multiple ways to look at real estate as an investment. You can buy, renovate and then sell; or you can buy and then rent the property. In both ways, you focus on managing the risk by either generating value to the investment, or generating revenue out of it. The real estate can be used while it is an investment, while you cannot use a stock; with stocks, you simply wait for dividends to be paid on it; with real estate you, as the owner, are the one deciding on generating the value or the income.

But the genesis remains usually the same one: investing in the real estate allow you to obtain a sense of security. This is why there are many investors who choose a real estate investment do keep in mind its nature of inflation hedge.

The real estate market has been alluring for years. Some people choose to invest locally while others choose to invest in other markets where there is more of a promise for inflation as a hedge. Understanding the opportunities is critical for one to succeed with the management of their portfolio, particularly as it results with real estate. The real estate can be commercial or residential and it can be located absolutely anywhere in the world.

There have been more opportunities popping up in Switzerland and the rest of Europe that has people intrigued. There has been also an increase of listed real estate companies as a proof that this asset class is becoming a need for most investors.

There is no such thing as a guaranteed, no-risk investment, though there are possibilities to come closer when the real estate is used as an inflation hedge, and this is why, we believe, more and more investors are spending their money to purchase assets in the form of real estate, to hold onto and to (hopefully) make a profit down the road.

Mirko Visco