Why real estate remains safe haven for investors amid rising inflation

For some reason, real estate remains a safe haven investment asset class at a time in Nigeria and across Africa when inflation is sweeping across economies like a whirlwind. When inflation rises, owners of real estate assets are protected which is why it is said that real estate is a good hedge against inflation.

Unlike bonds, stocks and other investible instruments, real estate is not reactive to market forces or economic downturns which is why it is called a laggard—always coming behind changes.

Experts advise that while inflation continues to erode the value of money either saved or put in stocks or bonds, real estate is the place to be for investors with patient capital. “Rather than losing value, the money put into real estate will be appreciating,” the experts said.

Over the past couple of months, according to a new report on the impact of inflation on real estate, inflation has been a key ‘ buzzword’ in global markets as it continues to rise, underpinned by factors ranging from the pandemic impact to the Russia-Ukraine war which has led to a surge in fuel prices and the cost of everyday commodities.

In Nigeria and some other countries in Africa, the case has not been any different. Nigeria has recorded inflation levels above 17 percent as of May 2022 while Egypt’s inflation rate jumped to 12.1 percent in March, compared to 4.8 percent in 2021. Similarly, Kenya’s inflation rate accelerated to 7.1 percent in May of 2022, the highest reading since February of 2020.

“In instances of rising inflation, expectation is that rents rise along with the prices of goods and raw materials; typical lease clauses usually allow for rent to be marked up to market hence protecting the investor in terms of net income,” Tilda Mwai, a senior researcher at Estate Intel, explained.

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Mwai cited cities like Accra where rent is marked up to market, noting that in this city, property owners increase their rental prices annually by at least 10 percent to 15 percent to beat inflation among other factors.

She pointed out however, that besides inflation, rental income is usually influenced by a lot more factors ranging from the levels of supply, market affordability to currency fluctuation, all generally impacting market performance.

Mwai pointed out that the situation in the office market is a different kettle of fish. She explained that the office market in cities such as Accra and Lagos were already being impacted by existing supply glut. “As such the markets are seeing high vacancy levels ranging from 12 percent to 36 percent (Lagos) and 20 percent to 25 percent (Accra) in Grade A and B offices respectively in the year to January 2022.

She anticipates a similar scenario to play out in the residential segment of the market, noting that, overall, that segment has seen an uptick in demand, especially for the mid to low end segments of the market. In Lagos for example, the young professional housing segment is driving this demand resulting in hotspots in areas such as Yaba.

In this location, she said, the price of a 2-bedroom apartment appreciated by 25 percent in the last five years – between 2017 and 2021, while in Accra, the low to mid end properties are also seeing high occupancy rates due to the domestic nature of demand.

“In many ways, commodity price shocks are pushing up building materials prices, leaving developers in limbo. Many countries in Africa have recorded an increase in the cost of building materials due to supply chain and inflation challenges. This is posing a challenge to developers and investors as they are unable to pass on the additional costs to the buyers,” Mwai said.

According to her, cost of building materials in Kenya has pushed construction costs by an average of Sh3,000 per square meter, forcing constructors to hold ongoing projects. In Nigeria Tribune, due to rising cost of building materials, labour, planning permit and documentation, developers have jerked up their house prices by 40 to 50 per cent in the year to April 2022.

“Egypt has been the most affected with the prices of building materials increasing by up to 92 percent in March,” she said, citing a report issued by the country’s Central Administration of Building Materials of the Ministry of Housing, Utilities and Urban Communities.

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