Real estate and inflation: How to protect your investments?

Sep 26, 2024

A house with a sign

Inflation is an economic phenomenon that affects the value of money, the cost of living, and financial markets. For real estate investors, inflation can represent both a risk and an opportunity.

But how can you protect your real estate investments against inflation and take advantage of this economic context?

This article explains how real estate can be a solution to protect and enhance your assets during periods of inflation.

What is inflation and how does it affect real estate?

Inflation refers to a general increase in the prices of goods and services over time. When inflation rises, the purchasing power of money decreases, which means you can buy less with the same amount of money.

Impact of inflation on the economy

Inflation affects all sectors of the economy, including real estate. It results in higher construction costs, materials, and wages, which can drive up sales prices and rents in the real estate sector.

Real estate as a safe haven

During periods of inflation, real estate is often considered a safe haven. Unlike other types of investments (such as stocks or bonds), real estate assets tend to retain their value or even increase due to the constant demand for housing. Additionally, rents can be adjusted upwards, allowing owners to align their income with the evolution of inflation.

Why does real estate protect your investments against inflation?

Real estate is one of the few assets that, during periods of inflation, offers several advantages for investors. Here’s why it is considered an effective protection against inflation.

Increase in rents

One of the main advantages of real estate in the face of inflation is the ability to adjust rents. When prices rise, property owners can increase rents to compensate for the loss of purchasing power. Thus, rental income generally follows the trend of inflation.

If inflation rises by 5%, an owner can adjust the rent accordingly, thereby maintaining the profitability of their investment.

Long-term appreciation

Real estate tends to appreciate in the long term, especially in high-demand areas. Even if prices may fluctuate in the short term, a well-located and well-maintained property generally increases in value over time. This appreciation helps protect your assets against the monetary erosion caused by inflation.

Leverage effect through mortgage

When you finance a real estate investment with a loan, inflation can work in your favor. Indeed, the amount of your monthly loan payments remains fixed, while inflation devalues the currency over time. This means that the real burden of your debt decreases over the years, allowing you to repay your loan with money that has less value.

If you have a fixed-rate mortgage of MAD 10,000 per month and inflation rises, your repayment remains the same, but the real amount of the debt decreases.

Protection against financial market volatility

Unlike stocks or bonds, real estate prices are not directly linked to financial markets and are therefore less volatile. Real estate offers some stability during economic turbulence, making it a safe investment to protect your assets.

Strategies to protect your real estate investments against inflation

To maximize the protection of your real estate investments against inflation, it is essential to adopt some smart strategies. Here are a few tips to secure your real estate assets.

Invest in high-demand properties

Rental demand is a key factor in protecting your real estate investments during inflationary periods. By investing in areas where rental demand is high, such as major cities or tourist regions, you ensure constant occupancy of your property and can adjust rents based on price changes.

In Casablanca, Rabat, or Marrakech, the demand for well-located apartments is strong, allowing owners to regularly increase rents in line with inflation.

Betting on rental real estate

Rental real estate is an excellent protection against inflation as it generates regular income. By renting out your property, you benefit from a constant cash flow that you can adjust according to inflation. Furthermore, rental properties often appreciate in value over time, offering dual protection: income and capital appreciation.

Opt for properties offering solid rental returns and located in areas where rental prices follow the inflation curve.

Use leases with rent indexing

To protect against inflation, it is advisable to include a rent indexing clause in your leases. This clause allows for annual rent adjustments based on inflation or a reference index (such as the consumer price index). This ensures that your rental income is aligned with price developments.

Diversify your real estate investments

Diversification is a key strategy to reduce risks associated with inflation. Instead of concentrating your investments in a single type of property or region, consider diversifying your portfolio by investing in different types of properties (residential, commercial, tourist) and in multiple geographical areas.

Carry out work to enhance the property

Renovation or improvement of a property can increase its value and justify a rent increase. By investing in modernization or energy efficiency works (insulation, heating, home automation), you make your property more attractive to tenants and can increase your rental income to offset inflation.

Renovating a kitchen or bathroom in an apartment can increase its rental value by 10 to 20%.

Invest in mixed-use properties

Mixed-use properties, such as buildings combining commercial spaces and housing, offer additional protection against inflation. This type of property allows you to diversify your income (commercial premises and residential units) and adjust rents to the respective demand of each sector.

The advantages of real estate in times of inflation

Investing in real estate during inflationary periods presents numerous advantages. Here’s why real estate remains an excellent choice for investors looking to protect their assets in a context of rising prices.

Inflation-adjusted profitability

Real estate offers the possibility of generating rental income that can be adjusted for inflation. This means that, unlike other investments, your income increases with the cost of living, protecting your purchasing power.

Reduction of debt burden

For investors with a fixed-rate mortgage loan, inflation reduces the real burden of debt. As your monthly payments remain constant but the currency devalues, the real cost of your loan decreases.

A safe haven in times of crisis

In times of economic uncertainty or crisis, real estate is perceived as a safe investment. Housing prices may fluctuate, but the demand for real estate remains constant, ensuring a certain stability for investors.

Conclusion: Protect your real estate investments against inflation

Real estate is an excellent way to protect your investments against inflation. Thanks to rent adjustment, long-term property appreciation, and the leveraging effect of credit, you can not only preserve the value of your assets but also generate regular and sustainable income from them.

By applying tailored strategies such as diversification and renovation, you maximize your chances of success in an inflationary environment.

Explore investment opportunities on Housing Place and discover properties that will help you secure your real estate investments.