The worst of the pandemic seems to be behind the world, more so with the financial rebound being observed across most significant economies around the globe. Wealth creation, high yield returns, passive income are marking a comeback as buzzwords.
On the other hand, sky rocketing energy tariffs, a meteoric surge in consumer demand widening the demand supply gap, rising food prices are leading to a sudden rise in cost of living. Not to mention the Ukraine war contributing to the already difficult economic climate . All this has led to a slow down in wealth creation and passive income yields.
The world is witnessing some of the biggest value erosions and meltdowns in global history as a perfect storm of factors have created never before seen challenges. New-age investment options including crypto currency are losing value faster than they ever gained.
As individuals and families looking to generate some passive income and continue the journey of wealth creation, the question is what helps beat inflation? Decades of research and number crunching have an insight – Real estate investment funds and real estate passive income is a hedge against rising prices.
Just in 2021, while living prices breached a 40-year high, private equity real estate, value add real estate investment and stock-based real estate investment funds outperformed the S&P 500 by approximately 13 percent. More importantly, rental income and overall property value have been seen to appreciate at a slightly higher rate than the general inflation does. This boosts long-time wealth creation.
While in general, real estate is one of those investment vehicles which delivers returns even in an inflation driven economy, not every component of the real estate market is averse to negative returns. Therefore, it is of utmost importance to seek expert advice and diversify even within real estate wealth building to guard against wealth erosion.
How does real estate shield investors from inflation?
Price of labor, supply, the price of raw materials, and other goods and services related to real estate assets, also increase in their cost as inflation creeps up. This also results in a commensurate escalation in rental yields from properties. All this results in the net income of a real estate asset owner being either safeguarded or in a slight addition to passive income.
There is evidence in hand which suggests that real estate assets have mostly appreciated across different hold periods ranging from 5 years to 20 years. One of the best aspects of real estate wealth building is the nature of returns offered. While it may not be high yield returns, the real estate market does provide a more steadfast, durable and dependable protection against price rise.
Which type of real estate investment is a good hedge?
Short term lease – Property owners who have lease periods which are short and thereby prone to regular increase in rental income, tend to do well based on the market conditions.
Investment in private equity real estate funds – A private equity asset manager focused on real estate, invests capital across a diverse basket of assets like single family houses, acquiring green field properties as well as land parcels which are partially developed.
An experienced private equity real estate firm who combines the use of technology and a deep study of the real estate market has the ability to build a portfolio of high value assets within the real estate market. Combined with vertical integration capabilities which enable “Build-to-rent” – such private equity firms offer value-add real estate investment opportunities for their investors.
