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Inflation and rent adjustment in residential real estate - discipline wins

Published by Michael Rose, 07.09.2022

Inflation has a negative impact on the cost structure of property owners and lowers the value of rental income. A consistent adjustment of rents to inflation - both for existing tenancies and for new tenants - preserves at least part of the purchasing power of the income. These adjustments are necessary, regardless of the development of the reference interest rate. A higher level of debt also helps as protection against inflation, as the cash value of the loan reduces over time.

Rising inflation

Inflation in all major Western economies has continued to rise in recent months and is already well above 8% p.a. in the USA, the European Union and the UK. The inflation rate in Switzerland is still significantly lower at 3.4% (as of July), but is also rising.

At the same time -­ after rising above 2% until June 2022 - long-term interest rates in Switzerland have fallen back again and are currently 1.71% (as of 31.8.2022) for the 10-year SWAP.

Rents and inflation

Inflation affects the returns for real estate investors. The real value or the purchasing power of the rent decreases due to inflation. At the same time, various nominal costs increase, especially for maintenance and renovation. The extent to which the investor is negatively affected by inflation depends on the share of inflation he can pass on to the tenant. In contrast to rents for commercial properties and retail space, which are typically indexed to inflation, residential properties require active action on the part of the landlord in order to at least partially secure income.

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