Real Estate: An Effective Hedge Against Inflation

by | May 3, 2022

There is absolutely no denying inflation today.

With food and energy prices increasing dramatically over the last few years, investors must protect themselves against inflation and the loss of value due to these rising prices. For example, inflation can erode fixed-income products’ principal values like bonds. The purchasing power of the interest payments declines over time as inflation rises, making these bonds less valuable. Stock market valuations often act in the same way, with investors discounting future cash flows at a higher rate when inflation rises, which pushes down the price investors are willing to pay for the stock.  

Real estate can be a great hedge against inflation. One of the primary reasons real estate can be a hedge against inflation is the effect of inflation on debt. As real estate prices rise over time, it lowers the loan to the value of any debt, acting as a natural discount. As a result, the equity on the property increases, but the fixed debt payments remain the same. Inflation also benefits real estate investors who earn income from the rental properties like almost all the opportunities at Sage. For example, a tenant pays rent to lease a building or property. That rent, or income to our partnerships, is based on a lease agreement that resets its pricing periodically. When this rental rate resets, it increases based on the increased value of the underlying property. Some leases renew every few years like industrial or retail properties, other leases renew monthly like apartments, and some even renew nightly like hotels.

The more frequently you are presented with opportunities to adjust the rental rates, the better the hedge against inflation. Resetting rates allow the real estate property to capture the new higher-priced value and, in turn, result in a better value for the investor. However, not all aspects of inflation can be avoided; but the good news is that there are ways to hedge against this risk. Real estate can be an excellent alternative for you, promoting you to protect yourself from the less purchasing power of your investment dollars.