One common effect from inflation (aside from raising prices on everything), is that it brings investment decisions to the forefront of conversation. Whether viewed as an opportunity or a risk, it’s important to be aware of these macro effects and how you react, or don’t, as a CRE pro.
With higher interest rates on loans and higher returns on bonds, it’s causing more pros to ask which is a better investment in this inflationary environment, CRE investments or bonds?
Diving into CRE investments vs. the bond market, let’s take a look at recent macro changes to help you determine whether your current strategy is sound or if you need to make some adjustments with your forecasting and future investments.
What is The Bond Market?
In addition to governments, traded companies often issue bonds for financial or operating reasons. When they do, they are released in the bond market. According to Investopedia, “the bond market—often called the debt market, fixed-income market, or credit market—is the collective name given to all trades and issues of debt securities. Governments typically issue bonds in order to raise capital to pay down debts or fund infrastructural improvements.”
Equity vs. Debt Investments
To decide whether commercial real estate investments or commercial bonds are a smarter choice, it’s helpful to know the difference between equity and debt investments. Investopedia is a great resource here as well; here is their approach to these CRE investments:
“Investing in real estate through a crowdfunding platform has certain advantages over REITs or direct ownership of property. One of those advantages is the ability to choose between debt and equity investments. Before taking the plunge into real estate crowdfunding, it’s helpful to have an understanding of how the two differ and what the risks are.”
It will always be up to the individual CRE professional, of course, but other factors (like the technology you use to track your investments) will affect your decisions.
CRE Investments vs. The Bond Market – Inflation’s Effect
Should inflation be a consideration in your decision? Absolutely. Inflation is pointed to as one of the main drivers for increasing interest rates in the macro environment. As a result, your thoughts on where inflation will go over the coming months and years will affect your investment decisions.
Inflation determines real yields. If a bond pays 4% in a 6% inflationary environment then your bond is paying out negative real yields. If your debt servicing cost is 4% and your financed asset is increasing with inflation at 6% then you’re on the right side of this equation. This is overly simplified because if you suspect interest rates will fall, you could qualify for a refinance to the lower market rates in the future. Both inflation and interest rates are moving targets in this formula, is the point.
It’s up to you as a CRE professional to consider your risk tolerance and where you think inflation and interest rates will go and how the specific assets you’re interested in investing in will perform.
The Technology Factor
Commercial real estate software is a scalable solution that can help you organize, track and account for all of your CRE investments. You can easily find and view all information, documents, strategies and reports related to the specific property you’re considering, or get a high-level view of multiple listings. With Quarem, data is updated real time and you’ll enjoy valuable market data and forecasting tools that will help you outsmart your competition in a complex investment environment.
If you’re debating which investment makes sense for you and your portfolio, request a demo of Quarem today to see how commercial real estate software can help.