Real estate should be reserved for long-term investors who are willing to accept reduced liquidity on part of their financial portfolio. It should not be seen as a substitute for short-term products.
What is the main advantage of introducing real estate into your portfolio?
An asset class that offers good visibility and regularity on returns thanks to rents.
In order to take advantage of this “income” approach, which allows, in the current low-rate environment, to maintain the level of financial products, it is nevertheless important to look at a few minimum criteria:
- Financial occupancy rate: leased proportion of your housing stock;
- The firm duration of the leases: the longer the duration, the greater the visibility on the return;
- The quality of assets and their valorization.
But this first approach is not enough, as it must be combined with an ability to anticipate returns by asset type and to understand geographic issues.
A well-diversified real estate allowance can generate on average a distribution of 4 to 5% per annum, but a portfolio made up entirely of Paris offices will yield 3% currently.
Do not hesitate to have professionals select your products, professionals able to analyze the whole market and to make consultations.
Take into consideration the hidden costs and ask all the stakeholders (manager, consultant, broker …) to display their direct and indirect remuneration.
What are the pitfalls to avoid in the construction of a real estate pocket or the evolution of an already existing real estate allowance?
The low-rate environment and the “at all costs” search for returns by institutional investors have led to a significant increase in real estate prices.
It has therefore become essential to be selective and to diversify the asset types and geographical areas into a real estate allowance.
Indeed, historically the real estate allowances of institutional investors have been exposed to office real estate, especially Parisian ones, at a minimum of 50%.
This strategy has been very beneficial due to higher prime office property prices (Quartier Centra Affaire) but represents a medium-term risk in a scenario of sharp and sudden rises in interest rates.
Indeed, the best assets called “bonuses” are now being bought for yields of less than 3%.
We therefore recommend that our customers:
- limit office exposure to a third party in the construction of an allowance.
- favour other types of assets (business, health, student residence, etc.) in new real estate investments and developments in their pockets.
- integrate a different risk profile and the construction of complementary performance (low distribution, shorter horizon and value creation for resale), taking advantage of opportunities on value added funds. These funds carry a risk of vacancy (minimum 30%) or on assets (restructuring) in order to create a “core” asset with high demand and high prices.