In this guest piece, Judith Tan, head of capital markets at EstateGuru, looks at how investors can hedge their bets against rising inflation by investing in property.
Less than two years ago, there were fears that the UK was on the verge of a deflationary spiral, but this February the inflation rate hit 6.2% and it is showing no sign of slowing down.
As the Bank of England Governor Andrew Bailey has warned, there is more to come. In its February Monetary Policy Report, the bank forecast the rate would peak at about 7.25% in April, and perhaps even higher later in the year.
That’s bad news for consumers and, combined with tax rises, it means households face the largest decline in living standards on record. But it’s not great news for investors, either.
Traditionally, shares are considered a protection against inflation. At best, though, the increasing cost of living means more volatility in the stock markets. Usually, high materials and borrowing costs combined with consumers’ declining disposable income are a drag on companies’ results. As for fixed-rate investments, increasing interest rates aren’t going to be nearly enough to help savers keep pace with rising prices.
However, there is one asset class that seems to shrug off inflation: property.
According to Nationwide’s index, residential property prices in the UK are up 20% since the pandemic began, and in the year to the end of February, they increased by 12.6%. Rival building society the Halifax had prices that month rising at their fastest rate for 15 years – even while inflation soared – increasing eight times faster than a year before.
Housebuilders are bullish. Bellway, one of Britain’s biggest, recently reported its operating margin had increased in the last year. As its chief executive explained, build costs are increasing, but house prices are rising even faster.
Broadly, property has long been a natural hedge against inflation. Buy-to-let tends to be particularly popular at times of rising prices, for example. Crucially, it’s uncorrelated to other assets, such as shares and, unlike gold, it’s an asset class most of us understand and are familiar with.
After all, many already pay towards properties monthly through a mortgage. It’s tradeable and transparent (unlike private investments in companies) and it’s easy for anyone to look up sales values and know exactly what they are investing in.
However, that’s not to say there aren’t tough challenges with property investing. There is a steep entry price for direct investment, with investors needing to commit tens and usually hundreds of thousands. Likewise, liquidity is an issue – property can take time to sell. Finally, it’s largely unregulated, lacking the safeguards of traditional investment funds and savings accounts.
Alternate finance methods for development removes or mitigates many of these obstacles to democratise property investment.
A crowdfunding-based model enables investors to pool their resources to back loans few could afford or want to commit to alone, or individuals can contribute a smaller amount to multiple developments, diversifying their investment portfolio.
Second, debt lending at a relatively low loan to value ratio can provide increased protection against any short-term fall in property values, while offering exposure to the benefits of rising property prices. If the loan defaults, the first port of call is the asset – the property itself. Moreover, using relatively short-term loans – like Estateguru’s which are 18 months on average – provides a shorter investment horizon should an investor not want to commit in the long-term.
Increasingly, platforms that provide this type of investment are vetted and under close scrutiny from relevant regulatory bodies in the jurisdictions from which they operate. Estateguru, for instance, is seeking approval from the FCA ahead of commencing activity in the UK. Platforms that seek approval need to demonstrate a solid business plan, good governance arrangements and operational control in terms of assessing borrower’s creditworthiness.
Of course, it’s still up to investors to do their due diligence. All investment carries risk, and nothing is really as “safe as houses”. Perhaps not surprising, though, property investment arguably comes close.
*Judith Tan is head of capital markets at EstateGuru