Inflation is one of the economic factors you need to be familiar with as a real estate investor. It shows the depreciating value of a currency over time in an economy by the rising cost of goods and services consumed in that particular year.
Kenya National Bureau of Statistics has recorded an average inflation rate of 5.2% over the past 5 years since 2017.
Take for example a house purchased at Ksh. 5,500,000 gains capital appreciation of 15% annually compared to the same amount in fixed deposit which earns a 7% in interest annually.
In actualization, the assets earn less the 5.2% of inflation in the same year, for the property the value will be Ksh. 5,882,250 compared to the money in the bank for Ksh. 5,115,000. Both have gained value for being assets on their own though real estate is cushioned more because of its higher rate of gains, therefore, the investment on real estate as an asset becomes one of the most important considerations for any astute investor because it acts as a hedge or protection against inflation.
Accelerated inflation leads to asset value also increasing; real estate is such an asset. This means that owning real estate is superior to owning assets in other industries such as finance, energy, or utilities due to the fact that real estate value appreciates over time, it becomes apparent that it is a more secure investment that adapts well to the economic trends of a country.
So, how does real estate protect an investor against inflation? Escalated inflation in the economy directly impacts the construction, labor and material costs to skyrocket in terms of purchasing, in turn this results to real estate development being expensive. When you buy an apartment, despite the changing costs to the developer – your agreement is in place at the value agreed and this value does not change. This makes you protected from Inflation.
In terms of land acquisition – a quarter acre in Syokimau is currently trading at Ksh. 15,000,000 as compared to fifteen years ago where the same property bought for speculation was trading for less than Ksh. 2,000,000. To early bird investors, inflation together with capital appreciation is a working formula to cash in on real estate acquisition.
The appreciation in property values enables a real estate investor to offset the negative effects of inflation. This is why real estate is considered the perfect hedge against inflation. Through real estate, an investor is able to both protect their real-estate investment and their net worth from inflation. Furthermore, real estate investment also opens up the opportunity for an investor to charge more rent if he or she has rental properties.
As an asset class, real estate presents an investor with numerous ways to benefit from rising inflation. With the booming inflation rates real estate investment trusts also appreciate and this presents investors with another opportunity
Prepared by: Sandra Njue
Edited by: Sumeiya Omar & Prit Shah