Investing in real estate: between strategic diversification of your portfolio and inheriting a family heritage

Real estate is an asset class that most individuals expose themselves to at some point of their lives. It is also likely to represent a large proportion of one’s wealth. Traditionally it is an asset class that is used for diversifying risks, hedge from inflation or produce steady cash flow or it can be also primary, secondary resident or inherited family asset.

Regardless of the proportion of the overall wealth the Real Estate investments represents, it is important to have a clear commercial and risk strategy around your investment. If not only because the size of the investment that can be significant but also because of the typical long-term investment horizon.

Real Estate maybe buy and hold investment in the sense of conventional asset management terminology, but one shouldn’t forget the various possibilities to optimize the short and long term investment profits by ensuring appropriate level of leverage and ownership structuring.

While the investment decisions for commercial real estates are made after careful considerations of expected yields, many private real estates are purchased and held to preserve generational wealth or simply made because of emotional attachment to the asset or location. Regardless of the nature of the Real Estate investment, it is pivotal to understand how this part of the wealth compliments  the overall portfolio and how one can manage risks such as increased interest rates or unexpected cash drainages that may arise in connection to the real estate investment or completely separately. It is prudent to budged sufficient liquidity or access to credit facilities when investing in Real Estate. Adverse situations, or opportunities, may rise quickly and one doesn’t want to be under liquidity shortage or miss good opportunity. Committed credit facilities, either secured with the real estates or other financial assets, can provide peace of mind with little costs.

As with all investments Real Estates are also subject to market risks. Unlike with financial assets it may be difficult to exit from the Real Estate quickly enough when the markets turn.  Consequently it is even more important that one is prepared to endure these economic cycles. This should be managed by ensuring sufficient liquidity is reserved and financing arrangements are negotiated in a way that risks for discontinuation of credit are minimized. Terms of the loan agreements may not seem that important when taking the loan and economy is booming, but they may trigger significant and devastating consequences in the middle of economic down turn when alternatives tend to be also few to none. Structuring your wealth correctly may also prevent one asset contaminating the rest of the portfolio and one can have the possibility to cut the losses rather than seeing the house of cards falling. These principals apply equally for private investors as for professionals.

Real Estate investments can be also used to expand or diversify investment portfolio or support business opportunities. This can be achieved by refinancing already owned properties which might be particularly interesting when the real estate has been acquired already some time ago and can be revalued at higher levels, or when the acquisition was made without using debt financing.

Financial institutions in Luxembourg service often HNWIs whose circumstances are less homogeneous and therefore consultation with a professional wealth planner can be extremely valuable. Qualified Wealth Planner can guide you through the overall assessment of your wealth addressing general issues surrounding asset protection, tax considerations, utilization of other bank products such as credits, but also plan the longer term future by introducing key considerations for succession and inheritance planning.

The earlier the Wealth Planner is involved the better. Real Estates are typically subject to stamp duties and various other administrative costs. Therefore already the initial acquisition strategy can make a significant difference and should be decided in consideration of longer term plans. Subsequent reorganization of ownership or (re)mortgaging may be costly exercises that could be avoided if the strategy is properly assessed beforehand.

Properties are also active assets in the sense that owners or beneficiaries often wish to benefit from them by either permanently or occasionally occupying them. This may restrict the universe of viable ownership or acquisition structures and need to be carefully considered. Property in a corporate structure may appear attractive but it may also limit the enjoyment rights by the beneficiary. Also certain forms of corporations may be limited in terms of permitted activity such as short term rentals. These are of course also very important considerations if one is looking to acquire property already in a company.

Acquiring a property in a foreign country, even in your home country where you aren’t resident any longer, can be time consuming and complicated. Access to advisors or credit may be restricted or difficult. Local bank’s may not provide loans to foreign residents and in return your house bank in the country of residence may not provide loans to a country where the property is located. Universal or retail banks may also limit the banking services to private individuals only in which case you might be deprived from otherwise available options. Working with a Wealth Planner provides you access specialist who is accustomed for unique situations, cross boarder considerations, long term planning and also very importantly to the local expertise that is always advisable.

Considering how many HNWIs these topics concern it is perhaps somewhat surprising that not many institutions can cater these needs holistically. The complexity of the regulation has driven even the private banking industry in Luxembourg that is used to deal with cross boarder situations to standardize their services and exclude what many clients still consider to be basic banking services. Too much of the wealth management services have been converted into commodity and clients are often left alone to deal with their situations that doesn’t seem to fit certain predefined criteria. Having a banking relationship where the bank is willing to understand specific needs and circumstances of its clients and offer bespoken solutions can provide tremendous support.

Investing in real estate is interesting not least because it provides good diversification for your portfolio but also because it is easy to get emotionally attached to part of the wealth that can be enjoyed and transferred as part of legacy to future generations.  It is and investment that one can touch and feel, feel passionate about and that’s what investing should be about.

Juho Hiltunen
Deputy CEO of Banque Havilland S.A.

(source: AGEFI Luxembourg (French version))