As the cost of living continues to rise, investors are increasingly looking for ways to protect their wealth from the erosive effects of inflation. Property has long been considered a reliable hedge against inflation but is this still the case in today’s economic climate? This article will provide an unbiased analysis of whether property is a sound investment strategy to mitigate inflationary risks. We will explore the relationship between property and inflation, the potential benefits and drawbacks and how different types of property investments perform.
Inflation is the rate at which the general level of prices for goods and services is rising and subsequently, purchasing power is falling. In simple terms, your money buys you less than it did before. For investors, this is a major concern as it can erode the real value of their returns. Assets that tend to perform well during periods of high inflation are those that can generate income or appreciate in value at a rate that outpaces the inflation rate.
Historically, property has been a popular choice for investors seeking to protect their wealth from inflation. There are several reasons for this.
One of the primary ways property can act as a hedge against inflation is through rental income. As the cost of living increases, landlords can often increase rents to match. This is because as the price of goods and services rises so do wages. This in turn means that tenants can afford to pay higher rents. This allows property investors to maintain their rental yields and ensure that their income keeps pace with inflation. Many commercial leases even have inflation-linked clauses that automatically increase the rent in line with a specific inflation index.
Property values also tend to rise with inflation. This is because the cost of building new properties including materials and labour increases with inflation. This drives up the price of new homes and in turn, the value of existing properties. As a result, the capital value of a property investment can grow at a rate that is equal to or greater than the rate of inflation, preserving the investor’s wealth.
For investors who use a mortgage to purchase a property, inflation can be particularly beneficial. The loan amount is fixed, but the value of the property and the rental income it generates are likely to increase over time. This means that the loan-to-value ratio of the property decreases and the real value of the mortgage debt is eroded by inflation. This can lead to significant capital gains for the investor when the property is sold.
While property can be an effective hedge against inflation it is not without its risks.
To combat inflation central banks often raise interest rates. This can make mortgages more expensive which can reduce the demand for property and potentially lead to a slowdown in house price growth or even a price correction. Higher interest rates can also increase the cost of borrowing for property investors which can eat into their rental profits.
Property is an illiquid asset meaning it cannot be quickly or easily converted into cash. If an investor needs to sell their property quickly they may have to do so at a discount. This makes property a less flexible investment than stocks or bonds which can be sold at any time.
Property ownership comes with a range of costs including maintenance, repairs, insurance and property management fees. These costs can eat into rental income and reduce the overall return on investment. During periods of high inflation, these costs are also likely to increase.
Not all property investments are created equal when it comes to hedging against inflation.
Residential property such as buy-to-let houses and flats can be a good hedge against inflation as rents can be adjusted regularly to keep pace with rising prices. However, residential property is also susceptible to changes in interest rates and government regulations which can impact its performance.
Commercial property such as offices, retail units and industrial warehouses can also be a good hedge against inflation. Commercial leases are often long-term and include inflation-linked rent reviews providing a stable and predictable income stream. However, the performance of commercial property is closely tied to the health of the economy.
Purpose-Built Student Accommodation is a specialised sector of the property market that has shown resilience during economic downturns. The demand for student housing is driven by university enrolment numbers rather than economic cycles. As the reference document highlights, the UK remains a top global study destination with a growing student population and a major undersupply of accommodation. This imbalance between supply and demand is driving rental growth in the PBSA sector, making it an attractive option for investors looking for an inflation-proof investment.
A perfect example of this performance is Graduation House in Nottingham. Developed by Prosperity Group, this project of 162 student apartments demonstrates how high-quality assets perform in a supply-constrained market. Strategically located in Beeston with a tram stop directly outside, it offers seamless access to both the University of Nottingham and Nottingham Trent University.
Despite economic headwinds, Nottingham’s student population of over 96,000 has driven significant demand. This resulted in average student rents in the city rising by 15.5% between the 2021/22 and 2023/24 academic years—a rate that comfortably outpaces many other asset classes. Graduation House capitalises on this demand, providing tenants with premium amenities and investors with a secure asset that has proven its ability to generate inflation-beating returns.
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Prosperity Group is a team of passionate, customer-centric property people dedicated to delivering quality homes and property investment in the simplest way possible. With a property portfolio of over £455 million in 2023, our results speak for themselves. We have a deep understanding of the UK property market and a proven track record of delivering high-yield investment opportunities for our clients. Our focus on purpose-built student accommodation and our commitment to affordable quality make us the ideal partner for investors looking to protect their wealth from inflation and achieve long-term financial success. We also have a unique monthly payment plan for investing in UK property which makes property investment accessible without large upfront costs.
Oliver Thacker is a Property Investment Consultant at Prosperity Group. He has a wealth of knowledge and experience of the UK property market from a background in local and national estate agency following that moving into the investment world of working with clients to build up income generating off plan buy to let portfolios.
Property is not always a good hedge against inflation. This is because it depends on a number of factors such as its location, the type of property, the terms of the lease and the broader economic environment. It is important to do your research and seek professional advice before making any investment decisions.
Alternatives of using property to hedge against inflation include assets such as inflation-linked bonds, commodities such as gold and oil and certain types of stocks. A diversified investment portfolio that includes a mix of different asset classes is often the best way to mitigate the risks of inflation.
To get started with property investment, the first step is to do your research and understand the different types of property investments available. You should also seek professional advice from a qualified financial advisor or property investment consultant. At Prosperity Group, we can help you identify the right investment opportunities to meet your financial goals and guide you through every step of the investment process. If you’d like to speak to one of our expert team then you can get in touch with us on +44 (0) 121 237 4610 or send us a message via the form on our contact page.
