Real Estate Investor Magazine South Africa October 2014 | Page 28

SMART MOVES

BY KOOS DU DOIT

Why Invest In Property?
The best hedge against inflation

I

nflation is often understood as the rate at which
prices of goods and services increase, but in reality
the effect of inflation is far more destructive: it
erodes the purchasing power of money.
For example, in 2009, a loaf of bread cost R5. Today,
a loaf of bread costs R10, which means R5 will now
only buy half a loaf of bread. Many would assume that
inflation has increased the cost of bread, but the truth
is that it is not the loaf of bread that has become more
expensive, it is the value of R5 which has halved. This
means that you need twice the amount of money today
to buy the same loaf of bread you bought five years ago.

fund will be equivalent to receiving around R850 000
today. That means that in 40 years’ time, when you
retire, you will be able to buy with your R22 million
retirement fund what you can buy with R850 000 today.
Even if the inflation rate averages 5%, as in the first
scenario, how long would you be able to sustain your
current lifestyle with the equivalent of R2.9 million?
As it is the rate of inflation that determines how
rapidly the purchasing power of money is eroded, and
what investment returns will be worth at retirement,
it is absolutely crucial to ensure that an investment
provides a hedge against the ravages of inflation.

Time value of money
In financial circles, this is referred to as the ‘time value
of money’ - the very real phenomenon that the value, or
purchasing power, of money halves around every seven
years, depending on the inflation rate. This means that
in seven years’ time, you will only be able to buy with
this R5 what you can buy with R2.50 today - a quarter
of a loaf of bread.

Hedging the risk
One investment that has proven to outperform
inflation is buy-to-let property investment. Firstly,
property price growth, while experiencing short-term
fluctuations, continues to keep pace with inflation
over the long term. In fact, it is widely recognised that
inflation boosts physical asset prices like gold, silver,
oil and property. Secondly, and similarly, the monthly
rental income generated by a buy-to-let property
keeps pace with inflation year after year, as the rental
increases each year by the amount stipulated in the
lease – generally 10% - or at least the inflation rate.
This means that the income is hedged against inflation
and will still have the same purchasing power - the
rental of an average house – in 2024.
Buy-to-let property provides a real hedge against
inflation, ensuring the value of your investments do not
halve every seven years, but rather maintain their value,
regardless of what the inflation rate may be.

Effect on investments
When the ravages of inflation are considered in the
context of retirement funds, it is clear why only 5% of
South Africans who have retirement plans will be able
to retire financially independent.
Let’s say that your retirement fund projects that
you will have R22 million by retirement in 40 years’
time. What that R22 million will be worth in 2054
will depend greatly on the average inflation rate over
the next 40 years, but two hypothetical scenarios will
illustrate the point.
In the second scenario, in which inflation averages
8% over the next 40 years, your R22 million retirement

AMOUNT

R22 million
R22 million
28

AVERAGE INFLATION TERM

5%
8%

October 2014 SA Real Estate Investor

VALUE IN TODAY’S TERMS

40 years R2 976 071
40 years R851 425

RESOURCES
P3 Investment Group
www.hope.co.za
www.reimag.co.za