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Does commercial real estate is the best investment to hedge inflation?
- Commercial real estate (CRE) has historically been regarded as a reliable inflation hedge. It is conventionally considered a concrete, secure, and low-risk investment. It is regarded as a safe haven to park your money, in fact. Earlier on, housing was the preferred investment in terms of value.
- The shift towards housing was caused by a number of things, including a lack of understanding about commercial real estate, readily available options, general recommendations from friends and family, and little trouble in maintaining the property.
- Over the last five to six years, there has been a shift in trends, with Indian investors now understanding the value of commercial real estate as a sophisticated asset class that can yield higher returns.
- Given that rental rates and property values generally increase in tandem with the overall rise in consumer prices, commercial real estate can be a valuable tool for hedging against inflation. A growing number of people are looking to invest in office stocks, retail spaces, shops, etc., in order to generate attractive capital appreciation and consistent rental income.
What is Inflation?
- The rise in the average price of goods and services is known as inflation. Purchasing power decreases as a result of inflation. Put differently, inflation is a process whereby an equivalent amount of money loses purchasing power.
- You don’t need to research the economy as a consumer to determine whether inflation is occurring—you can see it everywhere! Real estate, gas, groceries, etc.
- Bonds and other fixed-income investments are particularly vulnerable to inflation since their interest rates might not keep up with the rising costs of living. However, some financial assets, like real estate, have a history of acting as an inflation hedge. One lucrative investment for savvy investors is commercial real estate (CRE).
Historical Performance of Commercial Real Estate
It has long been believed that commercial real estate is a reliable inflation hedge. A McKinsey analysis claims that during times of high inflation, investors have been able to hold onto real value thanks to commercial real estate. For the majority of the last seven periods of high inflation, it has outperformed gold, bonds, and stocks, as well as inflation and its own historical average.
Current scenario of Commercial Real Estate India
- According to a report by Mordor Intelligence, The size of the India commercial real estate market is projected to be USD 40.71 billion in 2024 and grow at a compound annual growth rate (CAGR) of 21.10% to reach USD 106.05 billion by 2029.
- The data, however, speaks for itself: CRE is an appealing investment choice that offers distinct benefits and long-term profitability. As the market expands, new opportunities are arising.
- Investors also notice its remarkable returns, reliability, and portfolio diversification. Notably, the most sought-after investment options are office spaces, retail spaces, and fractional ownership.
Reasons for commercial real estate being an appealing investment choice
Smart Returns
Commercial is a far more appealing option to deal with when it comes to making smart returns. It assists you in creating a consistent cash flow with high rental yields.
In addition to having a higher appreciation rate than residential properties, commercial properties can offer a more consistent flow of rental income.
Inflation Hedge
Investing in commercial real estate can serve as an inflation hedge. Investors can profit from the appreciation of their investment when real estate values and rental income rise in line with inflation.
Because of the cash flow they produce, investments in commercial real estate can be a good long-term hedge against inflation. The value of tangible assets, like real estate, typically increases in line with inflation. There is a strong correlation between rising consumer prices rents, and property values.
Value Appraisal
One thing remains constant throughout time: the value of real estate rises with time. Future profits from an investment in the right property can be very high. higher financial benefit as a result. Long-term possession of a property results in an increase in its value. You will undoubtedly profit from the investment even if you intend to rent the property.
Increases in property value are almost certain if you invest in a property that has the potential to develop further in the near future. The market will regain its momentum after experiencing some volatility, making it a less risky investment option than other avenues.
Diversification
Diversifying one’s portfolio is made possible by investing in commercial real estate. Because real estate and other major asset classes have little correlation, it can offer stability and even higher returns during stock market downturns.
Professional Management
Professional property management is often required when investing in commercial real estate. With the rise of various alternate investment platforms, investors’ can save their time and resources. Such platforms enables them to assign day-to-day management responsibilities to qualified specialists.
Accessible Investment Options
Real estate investment trusts (REITs) and online real estate platforms are two of the many ways that investors can choose to invest in commercial real estate. These choices allow big and small investors to get involved in commercial real estate investments.
Fractional Ownership: A Smart Way to Hedge Against Inflation
For a very long time, owning a commercial property was considered a goal exclusive to wealthy individuals (HNIs). But more people are now able to invest in and profit from commercial real estate due to the concept of fractional ownership.
A sort of real estate investment known as fractional ownership enables several investors to jointly own a piece of a property. This type of investment can be an effective way to invest in commercial real estate (CRE) and hedge against inflation.
With minimal investment of 25 lakhs, you can invest in fractional ownership models offered by alternative investment platforms like Assetmonk.
Through Fractional ownership, you can diversify your portfolio. This can reduce risk and increase returns over the long term. Investors can spread out across several properties and build a well-diversified portfolio of various kinds of real estate assets because relatively little capital is needed.
The portion of your fractional portfolio that is invested in such rent-generating assets creates a steady and long-term income stream because many of these properties have stable tenants on longer terms.
CRE investments can provide a good hedge against inflation over the long term because of the cash flow they generate. Fractional ownership can provide investors with access to this inflation hedge at a reduced investment size.
Bottom Line
Commercial real estate can be a good investment to hedge inflation due to its potential for long-term capital appreciation, rental income, and inherent real asset value. However, like any investment, it is important for investors to conduct thorough due diligence, consider market conditions and property-specific risks, and diversify their portfolio to manage risk.
Ultimately, the suitability of commercial real estate as an inflation hedge will depend on an investor’s specific financial goals, risk tolerance, and investment strategy.
If you are considering investing in real estate, Assetmonk is here to help you. Assetmonk is an alternate investment platform in India that offers Grade-A commercial real estate assets to investors at reasonable prices, with an IRR of up to 21% guaranteed annually. Additionally, it gives investors the choice of fractional ownership.
