Following the hiatus of COVID-19 consumers across the globe are back to spending, causing a surge in demand, rising prices and concern about long-term inflation. Commentary about increased inflation has flooded global news outlets in 2021 and market commentators are busily predicting what will happen next.
Heightened rates of inflation seem to be a given; but will it be a short-term reaction or a longer-term outcome and what impact will this have on investment allocations and behaviour in the coming months as we move into 2022?
The Consumer Price Index (CPI) rise in the USA this June 2021 saw the biggest year-over-year increase for any month since 2008, with the index rising 5.4%. (Source) The cost of goods across industries is rising, leading to growing concerns about inflation. There are, of course, financial moves consumers can make to hedge against inflation. One of those strategies is to invest in real estate, especially when mortgage rates are low.
Provenance Properties, the exclusive Christies International Real Estate affiliate in the Cayman Islands spoke to wealth advisors to garner their opinions on the likely near-term impact of rising inflation and also about the prospect of investing in real estate as a hedge against inflation – Robert Janson, Dan Peterson and Corey Williams.
Robert Janson is chief investment officer with Westcourt Capital based in Toronto, Canada. The firm manages approximately US $4 billion of family money for wealthy multi-jurisdictional families. He spent the early part of 2021 with his family living in the Cayman Islands – choosing to take advantage of Cayman’s Global Citizen Programme.
Robert explains that “there have been studies into how people digest inflation and that an individual’s approach to the current rising inflation levels is often coloured by their life experience, given that many in the younger generation have not experienced inflation and hyper-inflation events.”
Dan Peterson is a Senior Advisor Private Wealth Management & Investment Advice with CIBC First Caribbean in the Cayman Islands. CIBC is a leading North American financial institution. Offering personal, business, and commercial banking and wealth management, it offers a full range of financial products and services to 10 million clients in Canada, the United States and around the world including the Cayman Islands.
Dan’s experience with clients and industry colleagues is that: “not many people think we are reverting to the bad-old high inflation days we experienced in the 1980s. We have a really long way to go before any of that would occur. However, the Fed’s position that this inflationary period is transitory. Well, the market isn’t really buying that, and I think we will see an extended period of higher inflation.”
Corey Williams is a Director of Bordier Bank (TCI) Ltd a subsidiary of Bordier & Cie (www.bordier.com), a Swiss private bank founded in 1944 which has seen many economic cycles during its 177-year history. Many of the families Bordier manages wealth for have seen all this before, and Corey commented that “we have faced many crises and managed our clients through it – we take a conservative approach to ensure our clients can weather these storms. We prepare for the worst and position accordingly. There is a concern that this inflationary period won’t be as transitory as first predicted and clients around the world are watching closely.”
Is inflation transitory or here for the long term?
Janson states that “many financial experts are looking closely at whether or not the current rising inflation is transitory or here for the longer term. Never in our history in the Western world have we seen a crisis of this nature, where there is a contraction in the economy, but savings rates have not dipped as you would normally expect.
“Normally in a recession, savings rates drop dramatically as people bridge themselves until the economy picks back up. But this time, with the overarching economic stimulus that has been put in place by Western governments, this has not happened. In fact, many countries’ populations have ended up saving during the pandemic. In Canada for example, Canadians saved $200 billion during the pandemic and this phenomenon is mirrored in other countries across the Western world.
“This time around, so much government money has been poured into Western economies, and the pockets of people, that we think that perhaps this inflationary period will not be as transient as people might expect and it will hang around for a bit longer than some have predicted.”
Is real estate a useful inflation hedge?
When considering real estate as a possible investment hedge with clients Janson shared that “real assets, such as real estate, have a long-established, concrete relationship with inflation. And they tend to hold the line with inflation and perform well in inflationary environments.
“So, if inflation rises, the value of real estate will too. Whereas by holding cash, for example, in a high inflation environment you are essentially losing value, as the cash you hold is worth less and less in real terms over time”.
Dan Peterson agrees that real estate prices rise pretty much in line with inflation and comments that “you can expect property to perform well in inflationary environments”.
This is something borne out by the longest-running home price index – the Case Shiller Index, which states that over the long-term (it goes back to 1890) house prices have risen pretty much in-line with inflation. This is largely because they are a hard asset, and it is expected that hard assets will perform well in inflationary environments.
Janson adds that “many of our high-net-worth clients are already invested in property as a part of their portfolio. Our client base tends to be high net-worth individuals with intergenerational wealth where the objective is preservation of capital so real estate investment is often a good long-term asset as part of their overall portfolio.
“As it applies to high net-worth individuals – they have seen their balance sheet keep up with inflation in well-managed portfolios and real estate will almost certainly be a part of this. Real estate is both a spectacular store of wealth and creator of wealth if you take a long-term view. For high-net-worth individuals they may own private homes, second, third and fourth homes and perhaps commercial or industrial real estate holdings too.”
Corey Williams notes the same trend with Bordier’s clients, who tend to be high net worth families investing multi-generational wealth, who are concerned mainly with the conservation of capital. Williams states that “many of these high-net-worth clients are already invested in property, but this period may see them investing even more into property than before.”
Real estate investment in the Cayman Islands?
Janson believes that “as it pertains to Cayman, the availability and supply of real estate, taxation, geopolitical stability and infrastructure, and the multinational community will make real estate in Cayman continue to be extremely sought after.”
“In addition, relative to other global cities and locales for HNW clients, Cayman is reasonably well priced. Cayman has a unique offering – the differentiated offering in Cayman puts it in an extremely strong position. Comparing real estate prices in Cayman to other major global financial centres such as London, New York, Toronto, Singapore and Hong Kong, Cayman real estate is still reasonably well priced per square foot and is likely to continue to be an attractive investment.
“ I think there is an opportunity for people looking for a very special place to live on a beautiful island that is also highly accessible. This makes Cayman attractive to wealthy individuals, not only as a place to invest, but also as a place to live and enjoy.”
Corey Williams adds “During the pandemic many wealthy, mobile clients have taken advantage of the opportunity to live and work from the Cayman Islands – taking advantage of the Government’s Global Citizen Programme. They now have a much better idea of what Cayman has to offer as a permanent or part-time residence; the fact that Cayman is an extremely safe place, has excellent infrastructure, has attracted big money investors like Dart, its taxation position, and the amazing lifestyle for families of all ages has seen a huge rise in confidence in Cayman. There has been a resulting rise in demand for Cayman real estate from many geographical regions, including Canada, the US and Latin America.“
Sue Nickason is VP of Sales and Marketing at Provenance Properties, the exclusive Christies International Real Estate broker in Cayman. Sue’s team recorded record the highest ever sale in the Cayman Islands this year with the sale of the Peninsula Estate, listed at US$17 million. According to the Cayman Islands Real Estate Brokers Association (CIREBA), sales of US$638.7m representing 327 properties were conveyed by 36 brokerages in 2020 alone. (Source)
In Cayman’s luxury segment of properties priced at US$1m and up, 69 condominiums and 57 residences were sold. Sue Nickason commented that “this was no small feat, considering the Cayman Islands’ borders have been closed to visitors since late March 2020 to protect its residents from the global effects of COVID-19.”
Cayman’s value proposition as an easy-to-reach luxury destination with excellent infrastructure, no direct taxation and a high standard of living have shone through in recent months and saw the pace of sales not only resume but surge during 2021 and 2021 once shelter-in-place guidelines were lifted in the Cayman Islands.
Sue Nickason added: “many real estate sales were generated by local residents, as well as international clients seeking to move to Grand Cayman. “Cayman’s residency programme allows a limited number of high-net-worth individuals to establish permanent residency here each year by investing in luxury property and meeting other programme requirements. There are no restrictions on foreign ownership, which makes acquiring a property straightforward for international investors. Our team enhances the transaction process by providing a bespoke relocation experience. As a result of robust local and international demand, the market continues to perform extremely well.”
For more information on real estate options in the Cayman Islands contact Sue Nickason and the team at Provenance Properties at email@example.com.
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