By Manoj Paliwal
Investing in real estate can be a great way to safeguard your money when prices are rising rapidly due to inflation, but it’s not as simple as it may sound. All real estate investments are not created equal, and inflation itself varies in nature. When prices are increasing, and the economy isn’t growing as fast, it’s crucial to understand that the type of real estate you choose can significantly impact your returns. Residential, commercial and retail are various avenues for one to consider.
Also Read: Exploring Bengaluru’s Real Estate Renaissance: Trends and Projections
The recent surge in prices is a result of various factors coming together at the same time. Many of these factors are temporary, like the rapid economic recovery, rising energy costs, and supply chain disruptions. As the world settles back into a more stable state, these problems are likely to improve, and price increases should level off. Inflation is an ongoing economic phenomenon, and many of the major price increases are caused by these temporary issues.
Now before we dive into how inflation can benefit the real estate sector, let’s first get a grip on what inflation is. Inflation is the continuous increase in the overall price level of goods and services over time. This means that the value of your money diminishes, leading to higher prices for everyday things.
For real estate developers, one of the most noticeable benefits of high inflation is the appreciation of real estate assets. As the value of money declines, tangible assets like land and properties tend to increase in value. Real estate has historically been seen as a haven against inflation because it can store and even increase in value over time. This rise in asset value not only benefits developers by enhancing their property portfolios but also attracts more investment to the sector
Positive Growth Factors: Increased Demand
Inflation often goes hand in hand with increased demand for real estate. As the costs of goods and services go up, individuals and investors may seek to protect their wealth by investing in tangible assets. Real estate, being a relatively stable and tangible investment, becomes an attractive option. This heightened demand can lead to more property sales, higher occupancy rates, and potentially higher rental income for developers. We have witnessed this in our peripheral projects in Mumbai located in the Dombivili area. Those who invested in these properties during launch are getting very high appreciation value every year.
Positive Growth Factors: Favorable Financing Opportunities
Inflation often prompts central banks to maintain lower interest rates to stimulate economic growth. Lower interest rates can translate into favorable financing opportunities for homebuyers and developers alike. Reduced borrowing costs make it more affordable to fund new projects, expand existing ones, or refinance existing debt. This can significantly enhance the feasibility of real estate developments.
Challenges and Risks
While high inflation offers several advantages to real estate developers, it’s essential to acknowledge that it also presents challenges and risks. For instance, construction costs may rise due to increased material and labor expenses, potentially affecting profit margins. Furthermore, developers must carefully assess market dynamics to ensure they aren’t overextending themselves and becoming vulnerable to interest rate hikes or a possible market downturn.
-The author is the CEO of Runwal Group. Views expressed are personal.
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