Inflation has affected every single country in the world. It results in people having to pay higher prices for their goods and services, and reduced purchasing power. In times like these, many people are uncertain about the way they invest their hard-earned money, as it could mean a loss for them rather than a profitable return.
Some investment that performs rather well despite inflation include:
● Gold and oil generally increase in price with inflation, and so do products made using thee.
● Bonds and securities are sometimes hedged against inflation which means their value will not be affected by it.
● Mortgage-backed securities generally do well in times like these.
● Real estate investments are generally unaffected by inflation as their prices also go up with rising rates.
● Investing in consumer goods such as staples will yield a good return because the higher prices are passed onto the consumer.
What is inflation and how does it affect investments?
In economics, inflation is defined as the rate by which prices of goods and services increase. This increase in prices means that the consumer’s purchasing power is reduced because their incomes remain the same. In recent years, many countries have seen a huge increase in inflationary rates which has affected the quality of life of people and also the way people are investing their money.
When it comes to investments and how it is affected by inflation, generally moderate to low inflationary rates do not have much of an effect on it, although high rates can affect certain types of investments in a negative way. Investing in stocks might be affected negatively.
How does inflation affect real estate investments?
The effect that inflation has on the real estate market is a mix of both good and bad.
● It increases the cost of borrowing: Borrowing costs will increase as inflation rises because banks will increase their interest rates in order to protect their profits. In addition, they will also offer fewer loan facilities during these times, since people may not be able to pay their monthly commitments with rising prices of goods and services needed for daily living.
● New constructions can cost more: When it comes to new constructions of buildings and houses, the cost of materials, labor, etc can go up.
● Rents will rise: Rental properties will increase their monthly rentals during inflationary times because more and more people will opt for renting due to the high cost of borrowing. This will create a huge demand for rental properties, causing their prices to go up.
● Property values will increase: Due to there being fewer new constructions, the value of existing properties will increase because there will be greater demand for real estate. For example, if you want to buy property from a Homagama land sale, the price may be higher now than it was a few months ago.
● Vacation rentals will suffer: With increasing prices and people allocating more of their income to day-to-day living expenses, there will be less money to spend on travel and vacations. Hence, those people earning an income from this industry will suffer.
Inflation and investing in agriculture
One of the best types of real estate investment you can make during times when inflation rates are high is on agricultural land for sale, like coconut land for sale in Sri Lanka. Even though prices of food increase by a huge percentage during high inflationary times, it does not mean that the demand for them will reduce (such as what happens to vacation rentals, etc). In fact, those in the agricultural industry can actually pass on the increased costs to the consumer.
For those looking for profitable investment opportunities during uncertain times such as these, investing in agricultural real estate will be the best option. Crops such as tea, coconut, vegetables, and fruits will still be in great demand, and their increased cost of producing these will be passed to the consumer as higher pricing, rather than them bearing the cost on their own. Hence there will be no adverse effect on their return on investment.
Sri Lanka in general has an environment that is conducive to the agricultural industry, and there are many crops that can grow on its fertile soil. Sometimes multiple crops can be grown on one estate, meaning varied sources of income for the owner. For example, on a coconut estate, owners can also grow other crops such as fruit, vegetables, or spices like pepper, etc.
Agriculture and related real estate are considered to be a hedge against inflation, meaning that it protects investors from the declining purchasing power caused by it. During these times, the value of these types of investments will either remain unchanged or will increase proportionately, causing no adverse effect for the investor.
Different ways of investing in agriculture
In addition to actually owning agricultural property, there are other ways in which you can invest in this very lucrative industry. These include:
● Real Estate Investment Trusts (REITs): Instead of owning the land, you can either rent it or invest in the trust and earn a good return.
● Agriculture stocks: Buying stocks and shares in companies within the agricultural sector is also a profitable venture during these times.
● Agriculture ETFs: These funds invest in agriculture companies that produce food products such as grains, crops, etc. They add diversity to the industry with investments in varied products.
● Mutual Funds: Mutual Funds that invest in the agricultural sector.
● Soft commodities: These are commodities that are grown and not mined.
These are some of the ways that you can make use of the positive effect that agricultural real estate investments have during times of high inflationary rates.
