2022 was a turbulent year for many financial assets. Due to rampant inflation, central banks around the world had to raise interest rates aggressively. And according to the latest Wealth Report from global real estate consultancy Knight Frank, the same risk will continue to haunt investors in 2023.
Using data from a survey of more than 500 private bankers, wealth advisors and family offices, the report finds that 67% of respondents say inflation is a top risk in 2023 for wealth creation and growth.
They have a point. In March, U.S. consumer price index increased 5% from a year ago. To put that in perspective, the U.S. Federal Reserve has a long-run inflation target of 2%.
That means whether the Fed will stay hawkish remains a big concern for investors. In Knight Frank’s survey, 59% of respondents also list interest rates as a top risk for 2023.
“The path of inflation will determine the course for interest rates and the results will reverberate through global asset prices,” the report says.
So where should investors look in the face of these risk factors?
Opportunities Still Exist
According to Wealth Report’s survey results, 46% of respondents identified real estate as a top opportunity in 2023.
It’s no surprise. Real estate has long been a popular option for investors looking to hedge against inflation, as property values and rental incomes tend to increase with rising price levels. Inflation also means higher construction costs, which can make existing properties more valuable.
Of course, to tame inflation, central banks have been raising interest rates, and that could be a hurdle to real estate markets. Higher interest rates increase the cost of borrowing, making it more expensive for potential homebuyers and investors to finance their properties.
That said, expert panelists of the report do see the potential of real estate in this environment.
“Real estate and alternatives will be where wealth is grown over the coming decade,” says David Bailin, chief investment officer at Citi Global Wealth. “With the rapid rise of interest rates, we have witnessed the value of these assets change, but the fundamentals for many sectors have not.”
In particular, Bailin is bullish on residential, industrial and warehousing.
These days, it’s easy to tap into the real estate market. There are plenty of real estate investment trusts that trade in the stock market – including ones that specialize in the above segments. Accredited investors also have the option to invest directly in syndicated multifamily real estate opportunities for maximum return potential.
James Wey, head of Singapore and Southeast Asia wealth management at JPMorgan Chase, also sees opportunity in real assets.
“In an inflationary world, real assets provide some hedge and uncorrelated returns from financial markets,” he says.
Wey also points out a few intriguing segments that are probably not the radar of most real estate investors.
“We are also looking at sustainable forestry as returns are attractive and not correlated with other markets and assets,” he adds. “Another area is investment in food technology and responsible agritech, particularly given the focus on food security.”
Indeed, food security has become a global concern. And one of the drivers of inflation has been rising food costs. While the latest headline CPI in the U.S. showed a 5% increase, the food index jumped 8.5% over the last year.
And since people need to eat no matter what, investing in agriculture could be the ultimate hedge against uncertainty.
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