What exactly is a hard asset? According to the Wikipedia page on the topic:
“Hard assets are investments with intrinsic value such as oil, natural gas, gold, silver, farmland, natural colored diamonds and commercial real estate.”
Like oil or gold, real estate is a commodity, meaning there is a limited supply and therefore it has an inherent value by serving a basic human need. One way to think about a property is in terms of the different commodities of which it is made: 1st) the building (steel, wood, concrete, etc.) and 2nd) the land.
Ultimately there is a limited amount of land in the world, although some land (New York City) is more scarce than others (Montana). The building itself is a combination of different raw materials. If the price of those materials goes up, the cost to build a similar building increases, in turn making the existing property more valuable.
So why are hard assets considered a worthwhile investment? Typically hard assets are an excellent hedge against inflation, meaning their value rises as the general price levels for goods and services increases (known as Consumer Price Index or CPI). Other investments, especially bonds and similar fixed-income debt instruments, typically lose value as CPI increases.
What causes inflation?
There are two primary drivers of inflation: economic growth and monetary debasement. Economic growth can drive inflation in rapidly growing economies when companies begin to raise the prices for their products. Because there is increasing demand for the product, unemployment falls and workers can lobby for higher wages. Monetary debasement occurs when a country simply prints more money making each unit of currency less valuable. This happens more often than you might suspect.
Why think about inflation?
Since the 2008 financial crisis, the Federal Reserve has printed more than $2 trillion new US dollars under a program called Quantitative Easing. The policy is intended to stimulate economic growth and bring down unemployment.
To date, there has been little or no inflation caused from the additional money the Fed has printed. Some argue that is because banks are in fact hesitant about lending out the money that they are receiving. Putting aside a debate about the success of the program itself, one potential risk of Quantitative Easing is that as the economy stabilizes and banks begin lending at a greater rate, we could see a surge of money being introduced to the market resulting in inflation.
The value of real estate
Commercial property is a unique investment class when compared to other hard assets in that not only does it typically preserve its value during periods of inflation, but leased commercial property can also be an income producing asset, paying dividends back to investors. For these reasons, real estate has historically been attractive to investors looking to protect themselves from periods of inflation.
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