When it comes to investment vehicles, experts agree that luxury real estate is safer and less volatile than stocks, gold or currency. It also tends to be more palatable to investors, who need to have less background knowledge to make a smart buy.
That’s why Thomas Veraguth, a Zurich-based senior economist with UBS Wealth Management, believes that, “it is very good to have real estate as part of a diverse investment portfolio.”
But while real estate, generally, is considered stable, luxury real estate tends to have steeper ups and downs than average buys, Mr. Veraguth said. For this reason, the entry point—or when you chose to buy within a market cycle—matters.
It‘s also important that a luxury buyer who makes this type of so-called alternative investment doesn’t over-leverage themselves and can hold on to the investment property for the long-haul, riding out any volatility.
“If you’re not forced to sell your property at the wrong time and remain in control of when to sell, real estate will protect you quite well,” Mr. Veraguth said.
With those general principles in mind, there are several factors that can impact the success of a luxury real estate investment. Most of these come down to the financial goals of investors, which can be a diverse group, including risk-averse buyers who want to keep the property for a long time, as well as people who want to make a killing on a riskier buy, made—and subsequently sold—at the right time.
Regardless of the type of investor, the first thing to do when considering a luxury purchase is drill down to the micro-scale details about the property rather than focus on the macro market landscape, said Harry Chernoff, a real estate developer and clinical professor at NYU’s Stern School of Business.
“A lot of people get lost in the macro issues,” said Dr. Chernoff, citing the overall increase of housing stock in the United States as an example of data that would prove irrelevant to someone buying a property in Manhattan.
Instead, he continued, a buyer should gather data to see how price per square foot, price-to-rent ratio and overall prices have trended over the past five or so years in narrow geographic regions they’re considering.
“You really have to get it down to the specifics of the property itself and the neighborhood it’s in within a short number of blocks to figure out if it’s a solid investment,” he said.
Zooming out to a citywide level, though, there are a few places at risk for bubbling over and facing a serious price correction, Mr. Veraguth said, which are documented in UBS’s 2019 Bubble Index.
“When you have strong increase in price,” Mr. Veraguth said, “on average, you will have a price correction of 30%.” But, no one knows exactly when that’s going to happen, or if the correction will be that severe. Still, it’s important to note that, “buying at the wrong time can be very costly,” Mr. Veraguth added.
Which is why getting the entry point right is crucial. If you look at historic data on a specific location as well as what’s happening in the larger city, you can see when things are trending upward, and anticipate when a price correction might take place, although even if a location is in “bubble risk” territory, a correction might still be one or two years away, as the last stage of a market cycle is generally a very strong price increase period, Mr. Veraguth said.
The good news for luxury investors is that, even if they get in at the wrong time, “luxury destinations should always recover, because you only have so many ‘best locations’ in the world,” Mr. Veraguth said, noting that the recovery can in some cases take up to 10 or 15 years. “If you can ride out a correction and aren’t forced to sell, your wealth will be stable and protected.”
The next two variables that every real estate investor should consider—and they go hand-in-hand—are their goals and time horizon.
To figure these out, an investor needs to consider how long they want to hold onto an investment, and what kind of return they want. If someone plans on living in the property, at least part-time, they generally have a longer time horizon of at least five years, Dr. Chernoff said. If they’re renting out the property for some of that time, they might be happy with a relatively low return with a goal of just preserving their wealth.
But if a company or a person purchases luxury real estate and needs to get a 15% to 20% return in three to five years, the investor is under the gun to select something that’s going to increase in value quickly. “If you can buy something in an up-and-coming neighborhood that costs one-third of a home in a more established area, some people will want to take that risk because there’s a chance they can make a lot more money,” Dr. Chernoff said. “People who do the best in real estate are innovative and creative like this.”
If the goal is to park money away for a child’s inheritance, as Edward de Mallet Morgan, a London-based partner at Knight Frank, recently had a client tell him he wanted to do, that time horizon is long, and the goal is for wealth preservation, but there are other variables this buyer needs to keep in mind.
While established areas in Manhattan or London are generally considered the most attractive for preserving one’s wealth, inheritance taxes on a $50 million property, which is what this client was looking to spend, would be significant in either place. But Monaco or the Bahamas, for example, don’t have inheritance taxes if you pass a property on to a direct descendant, Mr. de Mallet Morgan said, which may make them more attractive options.
“You have to always consider the future of the property and the next play to confirm you’re achieving your short- and long-term goals,” he said.
(via Mansion Global)
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