Hedge against inflation with capital appreciation

Mangalesri ChandrasekaranOctober 28, 2016

 

Findings show many property investors didn’t start off intending to make money through property. Usually, they just bought a house to live in. It’s only after seeing the value of their homes increase, and realising how much wealth their homes can generate, that many start to invest in real estate.

Financial advisers say there are a number of things most rich people do with their money that you should also consider doing. One is to invest in tangible assets (assets you can touch and feel), like in property which can produce income and grow in value over time.

This is a wise thing investors keep doing because property has many advantages as a dependable source of income. When you factor in the return and risk associated with buying property and shares, for example, property wins hands down.

As long as people choose to live in houses or apartment/condominium units – the young couple with enough savings for a deposit, the renter, downsizer or upgrader – residential property is always sought after.

Property investment can help investors preserve capital, soften the effects of inflation, generate income and create capital appreciation. Adding property to an investment portfolio helps increase investment diversification. It’s like not putting all your eggs in one basket.

Is property investment a good hedge against inflation?

Findings in Malaysia and other countries show property investment is good inflation hedge vis-à-vis other financial assets. It can provide protection from the depletion of earning power caused by inflation.

Inflation is an increase in general price level in the economy. Inflation decreases the amount of goods or services you would be able to purchase i.e. your purchasing power.

 

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Inflation rates are cyclical. The rates may be low today and higher rates are likely over time. Inflation can therefore act as a hidden tax removing value from unprotected investment portfolios.

Property investment offers good protection against inflation, and residential property offers good hedge against both expected and unexpected inflation.

As economies expand, the demand for property drives rents higher. This in turn translates into higher capital values. Therefore, property tends to maintain the purchasing power of capital, by passing some of the inflationary pressure on to tenants and by incorporating some of the inflationary pressure, in the form of capital appreciation.

Capital appreciation is a rise in the value of an asset based on a rise in the market price. It occurs when the asset invested commands a higher price in the market than an investor originally paid for the asset.

The capital appreciation portion of the investment includes all of the market value exceeding the original investment.

So capital appreciation is a source of investment returns; the other investment returns being dividend or interest income.

Property, when evaluated at reasonable holding periods, has historically posted attractive returns compared to other equity investments.

For an investor who maximises wealth, capital appreciation and hedge against inflation are major reasons why they invest in property other than pride of ownership, desired rate of return and risk diversification.

 

Here’s an example of where would be a good investment place for future capital appreciation investment.

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