BNP Paribas tips real estate to beat inflation, a conclusion I reached years ago

The Spanish arm of global banking and financial services firm BNP Paribas has tipped real estate as good investment to protect returns from inflation, a conclusion I came to years ago.

A recent report from BNP Paribas Wealth Management in Spain forecasts the current period of low inflation will come to an end, suggesting investors need to look for assets that protect real returns.

Inflation has been low for a decade or more, thanks to declining commodity prices, the output gap, and high levels of unemployment. But recent gains in raw material prices, and rising employment, should push up inflation in the USA and UK, and also in the Eurozone, argue BNP Paribas Wealth Management in a recent report that I read about in the Spanish press (I haven’t read the report itself).

How do you beat inflation? “A direct exposure to real assets guarantees attractive returns in the long run, improves the protection of a portfolio from inflation, and reduces the risk of declines,” says the report (quoted in the press). “Real assets include precious metals like gold, direct investments in real estate, and agricultural land.”

Real assets like property and precious metals have protected investors from inflation since fiat money was invented, so this idea is not new. But timing is everything.

I decided years ago that inflation was inevitable, as I watched governments and central banks respond to the economic crisis with ‘quantitative easing’ (printing money) that has flooded the globe with liquidity and debt. At some point I think inflation will have to follow, which is a kind of sneaky default. The only question is when will it come? If I understand what BNP Parisbas are saying correctly (based on press reports, so I could have it wrong), sooner rather than later. Periods of high inflation are common – I remember high inflation in the 80s – so just because we’ve had a few decades of low inflation that doesn’t mean it’s here to stay. And another thing; I don’t trust the inflation statistics. It seems to me the cost of living is rising faster than the CPI would have us believe, much faster.

I expected (official) high inflation to come much sooner, but then again I’m no economist (and we know how often they get it right). But based on my perhaps flawed assumptions, I saw the Spanish real estate crisis as a golden opportunity to acquire inflation-proof prime real estate at bargain prices. Sometimes, the best time to buy is when everyone else says you are mad to do so.

From about 2010/2011 onward you could pick up incredible bargains in Spain if you were a cash buyer. You could, of course, buy badly in that period, but you could also buy well. I know for a fact that people who bought at the Terrasses de Cala Tarida development in Ibiza that I advertised in that period are now sitting on capital gains in excess of €150,000. And if any of the professional investors I spoke to in 2012/2013 about prime buildings in Barcelona had listened to me, they would have made millions. You could buy entire buildings in prime areas of Barcelona for less than their replacement costs, implying the land was free, which if you think about it makes no sense in Barcelona, where land is so scarce. You would now have to pay 50% to 100% more for those same buildings today. At the time I had no cash to take advantage of the situation, and banks weren’t lending.

Les Terrasses de Cala Tarida, Ibiza

Now banks are lending again so I’ve been able to gear up and invest. I took out a 30-year fixed-rate mortgage with CaixaBank (HolaBank) to buy a property (pictured top*) in the Eixample Dreta district of Barcelona, in an area also known as the Quadrat d’Or (Golden Square). I have the crisis to thank for bringing the price of prime property within my reach, and making mortgage financing so cheap I could afford it.

That said, I am also well aware of the distress many people have lived through as a consequence of the crisis, and their investments in Spain going bad for one reason or another. Many were shafted by agents and developers, others invested unwisely, some were unlucky with their timing, some were simply crushed by macroeconomic events. I’ve heard from many of these people over the last decade.

But that doesn’t change the situation today. My bet is that the real value debt will be reduced by inflation to come in the next few years. Of course I could be wrong, and low inflation could continue for years, or even a period of deflation that increases the real value of debt (like Japan, so everything is possible). But do governments drowning in debt want deflation or inflation? I believe inflation is the only way out of this mess, and property is one way to protect yourself.

* Pictured from the patio de manzana, in other words the gallery seen from the backside of the building. You can often tell which flats in Barcelona are unoccupied or in dire need of renovation from this view.

About Mark Stücklin

Mark Stücklin is a Barcelona-based Spanish property market analyst, and author of the 'Spanish Property Doctor' column in the Sunday Times (2005 - 2008). He can be reached by email on ms@spanishpropertyinsight.com. All articles published in good faith as a general guide but no substitute for professional advice. Please read the SPI disclaimer

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