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Is investment in real estate a good hedge against inflation?

Singapore’s economy has been resilient and is recovering from the Covid-19 related restrictions. It recorded a GDP growth of 7.1% in quarter 3 of 2021. However, according to the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry  (MTI) press release, last December 2021, the year-on-year inflation rate was recorded at 4.0. This has been reported to be the fastest-growing inflation rate since 2013.

The inflation in Singapore could have been triggered by the oversupply in demand for goods and services as consumers tremendously increased their spending since the COVID-19 restrictions have been lifted. While lockdowns were necessary, they did cause some disruption in the supply chain, the adverse effect is price increases for certain goods. 

Accommodation or rental rates saw an inflation increase of only 0.2% from October to November 2021. Rentals are increasing at a stable pace. Does this mean that investors should consider investing in the real estate sector?  Yes. 

Property is a good hedge against inflation

According to Urban Redevelopment Authority (URA), Singapore’s Property Price Index (PPI) is expected to increase between 3%-5% in 2022. As such, the predicted value appreciation will ensure commercial property owners hold a hedge against the current inflation worldwide. In other words, purchasing real estate is money well spent as it is a legit store of value.

Store of value in the economic term is a property of an asset that does not depreciate over time. Economists consider real estate, gold and perhaps cryptocurrency such as Bitcoin to have the ability as a store of value. In other terms, investment in these asset classes ensures that the money spent on an asset will only appreciate in time. This factor is the determining point that makes real estate a good hedge against inflation. 

Benefits of investment in Singapore property

The recent survey conducted by CBRE Asia Pacific Investor Intentions Survey found that in 2021, more than 70% of respondents were interested in purchasing cross border investment. The survey results ranked Singapore as the Top 3 destinations investors find attractive to invest in, consecutively for 2021 and 2022. Singapore saw itself ranked among other capitals such as Tokyo and Shanghai. 

Below infographics interestingly show a rise in property transactions by 59% in 2021, suggesting that investors sentiment is steadily increasing. It also shows the property types investors have shifted to investing since the pandemic happened. Due to the almost two year restrictions and travel ban, the tourism sector has taken a hard hit in terms of generating revenue. This fact has in turn allowed real estate such as hotel properties and retail outlets to be sold at a bargain. 

Source: CBRE

The Island nation Singapore, a famous financial and economic hub for Southeast Asia, gives foreign investors an advantage if they own real estate there. A valid example is, in 2012 the price for a shophouse unit on St. Amoy Street was at S$5,000 per square feet (psqft). Today in 2022, the price has gone up by 240%, making it S$12,000 psqft for the same unit.   

Now if the investor was a foreigner from neighbouring country, Malaysia, he would also gain from the strong Singapore currency rate. In 2012 the exchange rate was S$1.00 to RM2.4 (Malaysian Ringgit), now the exchange rate is S$1.00 to MYR3.1, increased by 0.70 cents. This simply means that if he spent RM12 million on a 1,000 sq ft shophouse unit 10 years ago, he would be walking away with a sale of RM37 million this year earning three folds in profit.

Inflation will also cause rental to increase eventually in a stable manner, just like other goods and services. This perhaps is a good effect for property owners, it reflects cash flow while owning an investment property. While their mortgage payment will remain the same, their yearly returns will increase and be profitable. On the other hand, property owners residing in their own houses will not have to deal with the escalating rental price and rental market volatility. Buying a property concerns a lot more factors. It is best to consult a realtor who can offer a better understanding of the situation and help buyers find the right property.