PLACE FINANCIÈRE & MARCHÉS — Wealth management

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Opportunities across the property debt spectrum


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In a volatile and low interest rate environment, investors are looking at alternative yield enhancing opportunities. Private property bonds have become increasingly popular for portfolio diversification as they offer an attractive risk/return income for investors.

In a persistent rock-bottom interest rate context, income investors are eager for higher returns than those currently proposed on the traditional bond markets. Real asset-backed private debt, including infrastructure and real estate debt, could be a very attractive investment opportunity for high net worth individual clients or institutional investors. Private property debt also allows investors to simply invest their capital and take a more hands-off approach of acquiring income than investing directly in the real estate market.

Banks have continued to reduce their lending activity due to having to maintain higher capital reserves because of regulatory requirements. Due to these factors, private property developers have been driven to source funding from alternative sources. This has led to record levels of new investors financing this asset class.

“Luxembourg private debt industry grows 36.2% from 2019 according to the 2020”, KPMG/Alfi private debt fund survey.

These bonds are usually issued for a fixed term, which is typically set for a period of time that allows the property developer to complete the construction and generate returns. Depending on the terms of the agreement (usually 2–5 years), the lender (investor) will be paid a rate of interest (coupon) at agreed dates and will receive their capital back at maturity. In the event of default, the investor’s capital will be repaid via the sale of the assets that were used as collateral. These measures in principle ensure that the capital is protected once invested.

From an investor’s perspective, the appeal is therefore a higher fixed coupon than receiving a dividend from a stock or a coupon from a bond. This asset class also has much less correlation to traditional investments, hence offering greater diversification. There is currently a large supply/demand imbalance across many real estate markets, meaning a significant underlying asset price increase in case developers have to liquidate.

As with any investment, there are some risk factors to consider. An investor needs to analyse the real estate risk such as the underlying assumptions being made by the developer.  More experienced developers with a solid track record are more capable of getting better terms (paying lower rates) than recent start-up developers. Investors can expect reduced liquidity during the term of the loan and higher exit costs than traditional investments. There is also the issue that the underlying asset may decrease in value due to unforeseen events such as those seen in credit crunch in 2008 and the developer is forced to sell at a loss. 

An investor needs to analyse the real estate risk such as the underlying assumptions being made by the developer.
Karen Ruphy

Karen Ruphy,  Head of Wealth Planning,  Banque Havilland

Investors can reduce their risk by going into club deals or local real estate projects where their investments are more tangible and run by professionals with whom they could easily interact on the projects they invest in. The Luxembourgish and neighbouring real estate markets offer many opportunities designed on particularly relevant sustainability features, which makes both investment and social sense. In this asset class, ESG criteria embedded into the contemplated real estate or infrastructure project will not only tick the compliance box, but will significantly enhance the investment value and mitigate risks in such private debt structures investments.

Luxembourg is an attractive hub for both real estate and private debt vehicles. Its toolbox, the wealth of expertise across the ecosystem and the role of the regulator are all factors that contribute to Luxembourg’s success in this segment. It offers asset managers a wide range of regulated and non-regulated investment vehicles, which are flexible and tailored to the raising of capital from investors with a view of developing real estate assets.

Luxembourg is an attractive hub for both real estate and private debt vehicles.
Karen Ruphy

Karen Ruphy,  Head of Wealth Planning,  Banque Havilland

The continuous development of the real estate market in Europe and particularly in Luxembourg offers the possibility for clients to invest in local tangible real estate projects with trustful partners. The role of the private bank is to help the clients understand both the upside and downside risks of their investments. It is also to showcase some opportunities that have been diligently researched and filtered to best meet the client’s goals and objectives.