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24. January 2020

Investing in Swiss real estate: a step-by-step guide

Investing can appear to be a daunting challenge. But the underlying principles are very simple: buy an asset that other people need and hold onto it. It could pay you dividends (literally and metaphorically) in the years to come.

Nothing stirs more controversy in the investment world than real estate. On the one hand, it is a physical immovable asset many financial investors struggle to comprehend. On the other hand, it is intricately linked to financial assets and shares many similar features. What is an indisputable fact is that it has given birth to more billionaires (and millionaires) than any other sector.

Here we will look at the “how to” factor in real estate investment.

Why invest in real estate?

Real estate is either land or a building(s) alongside and any natural resources found there. They are physically tangible assets with inherent utility (and hence value). More importantly, land (especially residential land) has always been a scarce commodity and will become ever more valuable as urbanisation continues.

Real estate generates return in 2 forms: income (from rent) and capital appreciation (from the increase in value of the underlying asset).

A key differentiator between real estate and most financial investment instruments is the ability to leverage during the purchase. As a result, investor returns (both income and capital) can be significantly magnified, leading to exceptionally high ROI if timed correctly.

Why choose Switzerland?

Wedged between France, Germany and Italy, the Alpine nation of Switzerland is a country many have considered to be a safe haven for centuries. It is easy to see why when one considers the advantages:

• Political stability due to declared neutrality

• Peaceful existence as a sovereign nation

• Economic stability based on a developed economic model and prudent monetary/fiscal policies

• A highly sophisticated financial sector

• Advanced HDI (2nd in the world) and high standard of living

Low correlation with the global financial market, as illustrated in Figure 1.

• A deep and special relationship with the EU and a member of the Schengen Zone

Figure 1. The CH market has shown little correlation with the global RE market during the Great Recession.

Types of real estate

Real estate encompasses a broad category of assets with myriad sub-categories and RE-derived investment products:

  • Residential
    • Apartment
    • Houses
    • Holiday homes
    • Undeveloped land
  • Commercial
    • Office space
    • Warehouse
    • Retail stores
    • Mixed-use spaces
  • Agricultural
    • Grazing land for livestock
    • Crop land

For most of this guide, we will be talking about residential properties as an investment asset because they are most abundant, accessible and require the least specialist knowledge.

 

Average returns of different types of underlying properties in Switzerland

 

Type of properties Typical returns *
                                                Residential
Apartment up to 5%
Houses up to 4%
Holiday homes up to 4%
Fractional ownership up to 10% – 15%
Undeveloped land Depends largely on the location and use, potentially unlimited
                                                Commercial
Office space 3 – 8%
Warehouse 2 – 7%
Retail stores 2 – 5%
Mixed-use spaces 5 – 8%
                                                 Agricultural
Grazing land for livestock 1 – 2%
Crop land 0.5 – 1%

* The numbers assume no bank leverage applied

What are the key levers in real state investments?

Broadly speaking rental and property prices are dependent on two main factors: demand and supply. Put simply, if the demand for properties exceeds supply then prices will rise. If the market is flooded with unoccupied houses then prices will drop.

The supply of property is relatively fixed in the short-term (houses cannot be built overnight). In the long-term, supply is also much less elastic than demand due to zoning laws and the overall land availability. As a result, we will focus on the demand side.

Key factors influencing demand for properties:

• Population demographics: the greater the population, the higher the demand for housing (everyone needs a roof over their heads)

• Economic growth: the higher the growth, the more disposable income citizens have to play with

• Foreign direct investment (FDI): as the economy improves, its attractiveness as an investment destination not only rises in the domestic market but also to international investors. As a result, foreign capital will increase and distort the demand of the local market.

• Tourism: this is an indirect derivative of FDI. As the economy matures, it becomes increasingly attractive to visitors, who also need temporary accommodations. This adds an additional layer of demand on the market.

• Interest rate: this affects demand for housing in 2 ways. Firstly if the rate is lowered, then it makes bank deposits (the safest form of investment) less appealing. As a result, investors may deploy the cash elsewhere, channeling part of it into the housing market. Secondly, low rates lowers the cost of borrowing. As property is a leverageable asset, it means mortgage is cheaper to both prospective homeowners and investors alike, thereby increasing demand.

The different ways to invest in Swiss residential properties

Now that you are familiar with the key drivers of property prices, you may be rightly wondering: how do I gain exposure?

There are multiple ways to invest in RE, which coalesce around 2 themes: direct and indirect investment. Below is an overview.

 

Method Type Overview Entry barrier Transaction cost Management cost Return profile Liquidity Leverage
Self managed Direct Buying a property and managing it yourself $100k min 3-10% depending on the location 1-5% per year Capital: 3-5% per year

Rental yield: 3-5% per year

Low Up to 60% LTV
3rd party managed Direct Buying a property and use an agent to manage on your behalf $100k min 3-10% depending on the location 5-10% per year Capital: 3-5% per year

Rental yield: 3-5% per year

Low Up to 60% LTV
Fractional ownership Direct Buying a share (%) of a property. This can be direct or indirect (in the form of an SPV) $50k min 3-5% Nil Capital: up to 3-5% per year *

Rental yield: up to 7-14% per year *

Low Up to 60% LTV*
REITs Indirect Invest in funds that invest in real estates $1k min $5-15 per transaction 1-2% per year Capital: 5-10% per year

Rental yield: 3-5% per year

Instant None
Property funds, ETFs Indirect Invest in funds that invest in real estates $1k min $5-15 per transaction 1-2% per year Capital: 5-10% per year

Rental yield: 3-5% per year

High None
Real Estate Crowdfunding Indirect Similar to fractional ownership but the investor base is much wider $100 min 1% or less 1-2% per year Capital: 1-5% per year

Rental yield: 2-3% per year

Low None directly, indirectly up to 60% LTV
Real estate bonds Indirect Lend capital to RE developers to develop projects $50k min Nil 0-1% per year Capital: nil

Rental yield: 5-6% per year

Low None

* depends on what fraction of the asset you own

Direct investments

Evidently there are a wide array of investment options available . To determine the optimal way to invest in Switzerland there are a number of vital decisions to be made first:

Determine your objective

This is the most important question and it will cascade to all the subsequent decisions that you’ll subsequently be making: what is your aim with the investment?

There are usually 3 drivers: security of capital, appreciation of capital and the quality of income streams. They interconnect and mutually affect each other so that the increase in one will cause a deficiency in another.

For example, if you are seeking the safety of your capital, you will want to be investing in central locations where demand is high. However you’ll be in competition with many other buyers, leading to higher purchase price. As a result, the rental yield will fall.

You might wish to finance the purchase using debt, however this increases your leverage and could magnify your losses (and return, more on it later).

On the other hand, yield-hungry investors will be more willing to venture out into non-central locations and perhaps even commercial spaces which inherently possess higher yields.

Finding a balance of these 3 factors that suits your aims and financial position is a sensible first step in establishing what kind of asset suits your investment. Since it will drive most of your subsequent decisions, take your time and think it through.

Decide who will manage it

Real estate needs careful management, as it doesn’t bring returns unless it has rent-paying tenants. On top of that, real estate is a physical asset and is vulnerable to damage.

There are 2 main ways to manage properties: self-management or 3rd-party management.

Self-management is an easy and cost-effective solution as the main cost is your time. It is however impractical if you are not based close to your properties. In this case, hiring a professional 3rd-party agent might be the best option. They handle most of the daily tenancy operations, rent collection and maintenance. You should budget between 10-15% of your gross rent on agency costs.

One way to reduce management cost is to pool resources and use fractional ownership, as explained later on.

Select the asset type

Different real estate assets have vastly different return profiles. For example, most residential properties can be easily managed by the investors themselves or generic estate agents with minimal difficulties.  The low technical entry barrier inevitably increases the supplier and thus dents the yield. On the other hand, commercial properties (e.g. office space, industrial warehouses) have relatively high yield (up to 8% in most cases). Yet they require specialist management and have higher entry price tag. It makes them far less accessible and appealing to retail investors.

As a result, most references here will refer exclusively to residential properties. More specifically, given the majority of the Swiss population dwell in single or multi-family apartments, we will use these properties as the foundation. This is because by conforming to the norm, you are maximising the accessibility of the property. This reduces tenancy void periods and increase sales liquidity.

Fractional Ownership

To those who may not have the capital (or who do not feel comfortable committing large amount in one go), fractional ownership offers the ideal combination of low barrier to entry, minimal hassle and yet offering market-leading returns.

It’s a type of investment that lets you use the advantages of real estate investing without having the risks attached to managing the real estate property. This is achieved by owning a share of a property (very much like being a shareholder in a company) and letting a professional team to manage it.

Recently, a Swiss prime hotel chain, Le Bijou, pioneered a new form of fractional investing in the hospitality industry.

Typical hotel business consists of two “fractions”:

• the business of hotel operations (high value-added activity, high margin, high returns)

• real estate ownership business (low value-added activity, low margin, low returns)

So far, when investing in a hotel, an investor was forced to own both fractions. It didn’t matter if he wanted to have the exposure to the less profitable real estate ownership fraction and the related risks – there was no other option.

Le Bijou revolutionized the investment model in the hospitality business. It offers an opportunity to invest discreetly in the hotel unit setup (the franchise, interior design, and renovation, Uber-like service system, marketing) without the need to also invest in the actual apartment where the hotel unit is set up.

Thus, investors can benefit discreetly from the highly profitable fraction of the business: hotel unit operations, without locking down their capital in something that yields a much lower interest rate: ownership of the building where the unit is set up (low value-added activity).

This has transformed a traditionally capital-intensive sector into a capital-light and high-margin business, returning 14% yield to investors in the past year.

Select your location

You might have heard, a property is all about its location, location, location. A house/apartment that is close to the central business district, near convenient social amenities (e.g. nice restaurants, schools, transport hubs) and which has low crime rates will obviously be more desirable and hence more valuable than one that isn’t.

The thinking behind the real estate mantra about location is very simple:

• Humans need to work, eat, be educated and be entertained in a safe and nice environment.

• People want to achieve all of the above with minimal effort.

As a result, a property that ticks all the boxes must have the perfect location. Unfortunately most properties don’t and therefore investors need to compromise and pick what is important to them.

This circles back to the original objective of the investor. If you are buying it as your holiday home, that will also hold value over time, a residence in a resort town could prove to be a sensible choice.

If however you want your to be occupied consistently, then you need to move closer to cities and ideally buy apartments (renters rarely want to take care of outdoor spaces). Amongst renters, single professionals want to be as close to the city centre as possible whereas families are more likely to seek a quiet suburb with good transport links and easy access to schools and natural outdoor spaces like parks.

Study the area where your property will be and establish what greatest demand of the local market is.  Then, if you establish that there is a demand for properties that suit families, put yourself in their shoes. What would attract them to your property?

Are you willing to leverage?

There is an eternal debate amongst investors on the merits of leverage (using mortgage to partially fund a purchase).

Proponents believe that mortgages facilitate property ownership and can vastly improve the return on capital (you are using less than 100% capital to capture 100% of the gains) and enable you to diversify your portfolio base. Opponents argue that the opposite is also true where any losses are equally magnified.

The frustrating fact is that both sides are right!

Ultimately the decision comes down to the type of investor you are and what your risk appetite is. If you want to sleep absolutely soundly at night even when the world financial system is melting down then by all means, complete the transaction using 100% equity, if you can afford it.

However, if you want to achieve a slightly higher return, then there is no harm in introducing a small amount of mortgage into the purchase. Remember, each additional $1 of mortgage is another dollar you could invest elsewhere.

The key is to leverage in moderation. Financial leverage is just like a mechanical one. Too much stress would cause the pivot to snap. There are 2 critical ratios you need to be aware of:

1. Loan-to-value (LTV): this dictated the % of the asset value is made up of debt (rather than equity). The lower the number, the greater proportion of the asset you own, the lower the risk for banks and the better the interest rate you will receive.

2. Monthly payment: this is the amount of principal and interest you need to return to your lender each month. Since this will come out of the rent, it is obvious to state that this number should be less than your actual rent. In fact, it is advisable for the monthly mortgage payment to be no more than 50% of your total rent.

Choose your investment vehicle

Will you hold the investment under your personal name, your spouse or a non-natural person (e.g. a company or trust)? This may sound like a trivial legal formality but it has serious ramifications later down the line.

Many countries have restrictions against non-citizen investors in RE which range from additional bureaucracy, more taxation to any out-right prohibition. This could sometimes be partially mitigated by using a company registered in the host country. Yet this brings its own challenges in that mortgage lending may be difficult or expensive to obtain, not to mention the additional annual reporting requirements.

It is therefore advisable to seek appropriate legal advice before putting a name on the title deeds.

Wait and be patient

There are thousands of RE investment opportunities out there (after all nobody will refuse money). Yet finding the right one appropriate for your own circumstances may be less straightforward. Seeking the right opportunity is a lot like hunting, where you need a tremendous amount of work to prepare yourself (e.g. listing down your requirements, arranging finance, setting up legal bodies etc) in order to be ready to pull the trigger when the opportune moment arrives.

Remember, the right opportunity doesn’t present itself all too often so you need to be as ready as you can to take full advantage of them when they appear.

 

Indirect investments

Indirect investments is where you do not directly become the owner of the property, but instead, you become a shareholder in a company (a special purpose vehicle, SPV) which in turn owns the company on your behalf. This is a common method to pool capital together from various investors and complete a larger transaction. It allows investors to obtain institutional-level management and performance without needing to amass significant capital.

Below is a comparative overview of the key indirect investment avenues in Switzerland:

 

Asset type ETF REITs Crowdfunding Fractional ownership
Example UBS ETF (CH) – SXI Real Estate® Funds SWPRF Crowd House Le Bijou Owners’ Club
Overview This is an ETF that invests in real estate funds contained in the SXI Real Estate® Funds Broad Total Return. Swiss Prime Site AG is a listed property investment company which a portfolio value of around CHF10 billion and consists primarily of commercial and retail real estate. To become a shareholder in a company (SPV) which in turn owns Swiss properties. Become a shareholder in an SPV which in turn own or lease apartments in prime locations and transform them into luxury hotel units.
Return profile Averaging 4% per annum since 2015 3-5% per annum over the past 5 years 6.4% return on equity per year since 2015 7-14% per annum since 2011
Yield 1.65% paid annually Currently doesn’t pay dividends. Nil up to 7-14% per annum, paid yearly
Entry threshold As specified by your broker, recommended minimum level CHF 1,000 As specified by your broker, recommended minimum level CHF 1,000 Minimum CHF 100,000 Minimum CHF 50,000
Management cost 0.95% TER Broker commission, usually around CHF 10-15 per trade 4% (plus VAT) management charge per year

3% exit fee upon successful sale

Nil
Liquidity Instant Instant Low – needs to be sold to a willing buyer, which takes time to find. Illiquid, needs to be sold to a willing buyer, which takes time

 

How to invest in Switzerland if you are a foreigner?

Switzerland has strict rules when it comes to foreign investments in real estate.

According to Expatica, you can purchase a property if :

• You are an EU or EFTA national with a Swiss residence permit who resides in Switzerland

• You hold a Swiss C Permit

• If you hold a Swiss B Permit, you may also purchase a property, but only to live in, not as an investment

Licensing criteria are different from canton to canton, but the preference is given to applicants looking to purchase a primary residence.

 

In conclusion

Switzerland offers a tremendous range of investment opportunities with a hugely diverse RE market. Its economic stability coupled with the well-developed financial system means investors will never be short of options when it comes to properties. Take your time, do your research, get a feel of the environment and you will be richly rewarded.

 

23. September 2019

How to Invest in Switzerland Fast: Steps, Assets, Risks

We are living in turbulent times. There’s an ongoing trade war between the world’s top two economies – China and the United States; Iran is restarting its nuclear program; the war in Yemen is still waging; North Korea continues to test the patience of the international community by pursuing its nuclear ambitions. These developments represent significant threats to the world order. All it takes is a lapse in judgment with one individual and we could be plunged into chaos and horrific scenarios not seen since the Second World War.

Zurich

Why do you need a safe haven?

Today, it doesn’t matter whether you are a successful businessman or a respected executive, the political risks you face are both unpredictable and daunting. What will set you apart is your understanding of such risks and your ability and determination to handle them.

Having the ability to maintain and invest assets in a peaceful and stable country (and ideally being able to obtain residency there) could mean the difference between living calmly and existing miserably. In many instances, it could be a choice between life and death.

What you need is a safe haven – a neutral and advanced country that is insulated from geo-political events, which also has a high standard of living and a strong focus on the well-being of its citizens. 

It is no wonder that safe havens are often referred to as the best life insurance money can buy.

 

The charm of Switzerland

Wedged between France, Germany and Italy, the Alpine nation of Switzerland is a country many have considered to be a safe haven for centuries. It is easy to see why.

Declared neutrality

Switzerland has been a politically neutral country since the mid-15th century. This means that it does not typically take sides during conflicts, which vastly reduces the probability of it being subject to hostile actions. As a result, while other nationshave spent centuries fighting for global or regional hegemony, the Swiss have simply been developing their own domestic economy and minding their own business.

More importantly, Switzerland operates a “people’s army” principle where conscription is mandatory and every person can retain their firearms even after their service. What we effectively have is an 8 million-plus strong decentralised army that makes both external military invasion and any internal rebellion difficult. This contributes immensely to its stability.

Peaceful existence

Switzerland realised early on that declared neutrality is not sufficient to protect itself from conflict. As a landlocked nation wedged between other European powers, it needed a way to maintain its neutrality.

The Swiss found two ingenious ways to do just this:

● Act as a mediator between warring factions: Not only does this approach fits Switzerland’s declared neutrality, but also keeps the country away from any possible tension. After all, who would pick a fight with someone who’s trying to stop a fight?

● Develop a sophisticated banking sector: The Swiss banking industry has built such a respectable reputation that several prominent families, including some from Europe’s royalty and nobility, store their fortune there. To them, Switzerland represents safety. The unintended (or perhaps intended) side effect is that it is in nobody’s interest to attack Switzerland, as doing so would jeopardise one’s own fortune.

Banking protection and secrecy

As the Swiss banking sector evolved, the federal government increasingly intervened to protect its prised industry. Two measures were particularly prominent in its effort to boost confidence in the sector:

● Deposit insurance: Switzerland was the first country to formally establish a nation-wide deposit insurance scheme in case of a bank’s insolvency. This boosted investors’ confidence and encouraged capital inflow.

● Banking secrecy: In Switzerland, it is a criminal (rather than civil) offence for bankers to disclose client data without permission. Consequently, there’s a significant disincentive for bankers to breach such a condition, and as a result, Switzerland’s standing as a banking destination grew. Note: Switzerland does have automatic tax information exchange mechanisms with many countries in the world as per CRS guidelines. However, the type of data exchanged is extremely limited and well-defined as per CRS.

Advanced domestic economy

After years of peaceful existence unscathed by wars, the Swiss economy is one of the most advanced in the world, boasting an exceptionally high GDP per capita ($80k in 2017, twice that of the UK and 50% higher than the US). It relies significantly on domestic consumption, and hence is well-insulated against global shocks. For example, the Zurich residential market suffered only a modest drop in valuation during the Great Recession in the late 2000s.

Furthermore, Switzerland enjoys an independent monetary policy and a low debt-to-GDP ratio, which enhances the credibility and stability of its economy.

Special relationship with the EU

As a neutral country, Switzerland is not part of the European Union. However, a series of bilateral agreements means it participates extensively in the European Single Market and is part of the Schengen Area of passport-free travel. As a result, the Swiss enjoy many of the economic benefits of the EU without having to undergo the comprehensive political integration associated with EU membership.

Low tax rates

Taxation rates in Switzerland have historically been low. Currently, the highest band of personal income tax is at 32% in the Canton of Jura. Comparatively, the highest income tax rate is only 12% in Zug. The corporation tax rate has a fixed 8.5% federal component and a variable canton component, with the top total tax rate not exceeding 25%.

 

Failure to prepare is preparing to fail

city in Swiss

Ask anyone who had to successfully flee quickly from approaching armies or unexpected natural disasters, and they’ll you that their successful flight from peril was due to preparations made beforehand in anticipation of impending threats.

When New York City plunged into darkness during Hurricane Sandy in 2012, the Goldman Sachs office building was the only location that had power and could maintain operational continuity. Why? Because it had previously installed and waterproofed power generators specifically for incidents like this.

Benjamin Franklin rightly said: Failure to prepare is preparing to fail.

The same can be said about investing in Switzerland quickly. It is imperative that you start making preparations now if you foresee such a need in the future. 

There are two key elements that need to be considered here:

1. Setting up a Swiss bank account

2. Getting the capital out of your home country and into your Swiss account

Setting up a Swiss bank account

Opening a bank account nowadays can be tedious even for local residents, let alone foreigners, thanks to stringent anti-money laundering regulations. It is therefore essential that you start the process early. It has become standard for banks to perform a KYC (know your customer) verification and request an audit trail of how you accumulated your wealth (also known as an inquiry into sources of funds). In addition to proof of your identity, a Swiss bank will also probably ask you for your purpose of setting up the new bank account. As a result, it is crucial to maintain and submit proper documentation in order to avoid potential delays.

Expected time: Allow 2 months

Steps: Choose the appropriate bank; attend the account opening interview; prepare and send documentation

What you will likely need: Passport, proof of address, proof of assets, sources of wealth

What can be a reason for a delay: Incorrect documentation, failure to pass credit checks, KYC compliance issues on the sources of your wealth

Money transfer to your Swiss account

Getting your money and assets out of your home country might be more challenging. Switzerland itself does not impose capital controls, but many other countries do. It is important to understand the financial rules in your home country and abide by them. Otherwise, this could jeopardise the KYC process at the Swiss end.

Expected time: From 1 week to a few years depending on the amount of money you’re looking to transfer and if capital controls are in place

Steps: Decide on the amount to be transferred; understand the restrictions imposed by banks and authorities; make the transfer

What you will likely need: Recipient bank details; proof of ID, proof of address, purpose of the funds transfer, source of the funds

What can be a reason for a delay: Failure to provide the documentation above to satisfy bank’s compliance team

 Credit Suisse

Asset types that can be invested in Switzerland

Switzerland boasts a mature financial market and therefore it is no surprise that there’s an array of different assets available to investors.

 

Asset / Features Cash deposit Bond Stock Real estate Commodities PE/VC
Overview Depositing capital in a regulated financial institution in exchange for regular interest payments Lending capital to corporations or governments in exchange for regular interest payments Direct or indirect ownership of public companies Direct or indirect ownership of physical properties Direct or indirect ownership of commonly traded raw materials (e.g. gold) Direct or indirect ownership of private companies or early-stage businesses
Investing completion timeframe Instant Almost instant Almost instant Months if purchasing directly;

within one week for indirect purchases

Almost instant Months
Capital gains Nil Nil on primary markets; possible on secondary markets 8-10% per year for an index fund; significant upside with the right growth model 5-6% per year on average depending on the location and property type Highly variable; between -50% to 100%+ depending on the type and timing Highly variable, can be 0% or 10x+ of invested capital
Income potential Between 0-3% p.a. depending on currency and terms Investment-grade bonds trading around 3-5% p.a.; junk bonds at 8%+ 2.5% dividend yield per year 3-5% rental yield per year Nil Nil
Risks No risk if the deposit is within the protected limit (currently CHF 100k per individual per bank) Adverse financial performance leading to debtors defaulting on the loans Adverse financial performance undermines the valuation and threatens dividend payment Adverse economic conditions could reduce demand and drive down both price and yield. Highly volatile and vulnerable to swings in global demand and supply High uncertainty in business performance (hence return); high chance of permanent capital loss
Liquidity High if instantly accessible, otherwise a penalty might incur Usually high as these loans are publicly traded Usually high as these securities are publicly traded Usually low as properties are illiquid; can be partially mitigated through investing in REITs Usually high as commodities are publicly traded with transparent pricing Low
Transaction cost Nil Low Low Around 3-10% depending on the location Low Around 3-5% of the transaction amount
Management cost Nil Low Low 1% of the asset value per year 1% of the asset value per year 1-3% of the asset value per year
Entry barrier None Usually around $1,000 Usually around $1,000 At least $20,000 for an entire property or $1,000 per REITs. At least $50,000 for physical commodities or $1,000 for commodity ETFs. At least $100,000
Suitability Suitable as a short-term holding facility for your portfolio dry-powder; unsuitable in the long-term due to the erosion of purchasing power from inflation. Suitable as an income-generating engine of a portfolio Suitable as part of any long-term investment strategy Suitable as part of a  long-term income generation and value- preservation strategy Suitable as a short-term portfolio hedge against uncertainty Suitable for sophisticated investors not afraid of permanent capital loss of the invested capital

 

Examples of Swiss assets available for fast investment

Cash Deposit in Swiss Francs

Swiss Franc is considered one of the world's most stable currencies

Swiss Franc is considered one of the world’s most stable currencies

Below are the two investment banks that are confirmedly interested in international customers and have fast KYC process:

1. REYL Group

2. PostFinance

Swiss Bonds

Swiss National Bank, an institution that governs Swiss treasury bonds

Swiss National Bank, an institution that governs Swiss treasury bonds

Below are two examples of Swiss corporate bonds:

1. Le Bijou Bonds (multiple, up to 5.5%) 

2. ABB Bonds (multiple, 0.3% – 2.25%) 

Additional references:

1. List of all Swiss Corporate Listed Bonds

2. Vontobel Bond ETF Allocation List – this can be useful to see in which bonds Vontobel invests

Swiss Stocks

Swiss Industrial Park

Swiss Industrial Park

If you don’t have a reason to believe you can beat the market in picking stocks, best would be to invest in market indices:

1. Swiss Market Index and its performance

2. UBS 100 Index – a fund of 100 largest Swiss stocks

Swiss Real Estate

Le Bijou, a hotel that yields up to 7 - 14% p.a.

Le Bijou, a hotel that yields up to 7 – 14% p.a.

1. Le Bijou Equity (up to 7% – 14% p.a)– fractional ownership of real estate

2. List of 140 Swiss REITs

Commodities

Credit Suisse Gold Bars

Credit Suisse Gold Bars

While gold is believed to be a good instrument to preserve wealth during the financial crisis, this can’t be said about other commodities, which price is driven largely by the industrial consuption, thus can decrease during the financial crisis. That is why we will limit this overview only to gold.

Buying gold in Switzerland is easy with ETFs that reflect the market price of gold:

1. Julius Bar Physical Gold ETF

2. UBS Gold ETFs

Swiss Private Equity / Venture Capital

Private equity placements take a lot of time and relationships building

Private equity placements take a lot of time and relationships building

The entry ticket varies a lot, although with $100K – $1M you would be able to work only with some of the smallest private equity firms in Switzerland.

Helpful links:

1. Top firms that manage Private Equity investments in Switzerland (prepared by Crunchbase, worth registering)

2. Linvo AG, an example of a wealth management firm that can manage capital starting from $5M, as well as handle the international funds transfer.

In conclusion

There are many occasions in life where what appears to be a simple and quick endeavor actually requires extensive preparation and a lot of effort. Preparing to be able to successfully invest in Switzerland is a perfect example of such an occasion. But all your hard work will pay off as you will ultimately be rewarded with an unparalleled level of protection and stability for your assets at the end of it the day.

 

Happy investing!

22. August 2019

Investing 1M in Switzerland: Principles, Risks, Returns

So you’ve finally made it: the big, fat seven-figure bank account. 1M! For those who have the privilege of seeing that balance in their account, the thrill is both exhilarating and scary. On the one hand, you are happy to be admitted to the world’s 0.6% club. On the other hand, you are now preoccupied with maintaining and growing your wealth. Understandably, managing 1 million (CHF, EUR or USD) is vastly different from managing 100K.

In this article, you will learn how to manage your 1,000,000 (CHF/EUR/USD) from someone who has had years of experience managing and growing a successful multi-million dollar personal portfolio.

 


See also:


 

The philosophy of wealth

It is important to take a step back and understand what wealth is and what its limitations are.

First of all, wealth cannot buy you time or health (some may even include happiness in this bracket). These are intrinsic to the laws of physics that govern our world. No amount of money, stocks or properties can change this fact.

That being said, wealth is an important facilitator in your life. It allows you to accomplish your objectives with ease and minimal frustration, thus increasing your pleasure. It is also an enabler of interpersonal interaction which enhances your personal well-being.

When viewing wealth as a facilitator (rather than the end goal), the natural question is, “what is the end goal?” Unfortunately, there is no universal answer to this – it is as personal to every individual as a fingerprint. However, by understanding your end goal, you can better appreciate your investment objectives and thereby deploy your capital strategically.

 

The 4 principles of investing globally and in Switzerland

Books weighing as much as bricks have been written on this subject. There is much technical and academic literature out there, each one fiercely disagreeing with the other. We have distilled them into 4 easy-to-remember principles that are relevant across any investment scenario.

1. Don’t lose money: this is the Number 1 Rule for Warren Buffett and it’s something I hold dearly. Never invest in a venture that has a high risk of permanent capital loss. This refers to projects (or companies) with underlying structural defects that could put them out of business one day, rather than just causing temporary fluctuations in valuation. After all, any percentage gain can be temporary whereas a 100% loss is permanent.

2. Don’t forget Rule #1: the idea of never losing money is so important that it’s worth reinforcing it with a rule of its own. 

3. Slow and steady wins the day: here’s a brain teaser. Which investment will yield a greater return: 5% for 10 years, or 10% for 10 years but with a 35% market fall in the middle? Yes, you’ve guessed it correctly, a steady 5% return year on year triumphs. This is a simple mathematical reality: percentage gains and losses are not created equal. A 50% loss will require a 100% gain to return to break even. Always remember that.

4. Self-edification is the only way to survive and thrive: there might be more than a few individuals and firms out there willing to help you “manage” your wealth. The truth, however, is that nobody will place your interests closer to heart more than you will. As a result, it’s vital to educate yourself about investing so that even when you do end up entrusting your capital to a professional, you still have the know-how to keep them on their best behaviour.

 

The wealth playbook: How to invest 1M

Now that you are well versed with the principles of investing, it’s time to put them into practice. This playbook section will teach you how.

 

Purpose & Goals

It might sound cliché, but investing without a goal in mind is like sailing to an unknown destination. You won’t know when or if you’ve reached your goal. Consequently, it’s important to know what you want your portfolio to become in the future.

At the most basic level, there are 2 key functions of a portfolio:

1. To generate a sustainable and rising level of income -> this is ideal if you want to live off the passive income stream and achieve financial independence. At the 1 million level, with a 5% yield, you’ll be looking at 50K of income every year, which can propel you towards financial independence.

2. To achieve real growth in the capital value of the portfolio -> this is usually for creating a sizable lump sum for a specific future endeavour (e.g. house purchase, education).

Depending on which goal you pursue, there will be different asset allocation implications. For example, income-focused investors would allocate greater capital to income-generating assets (fixed income, dividend stocks), whereas growth-minded investors would invest in high-potential growth stocks.

 

Establish your time horizon

Do you want to achieve your goal in 5, 10, 20 or just 2 years? Your time horizon is critical in deciding your asset selection. Generally, the faster you want to achieve a certain goal, the greater the return needs to be and hence the higher the risk. As a result, your time horizon is directly linked to the risk you need to take on.

A good benchmark would be the long-term average return of the Swiss Market Index, which has delivered 5.82% Average Annual Total Return for the past 30 years. At this rate, your portfolio should double in value every 12 years.

The general advice at the 1M level is to just let the portfolio grow by itself, and to interfere as little as possible. This way, you can enjoy the full effect of compound growth and let time do all the hard work.

 

Choose the right portfolio structure

Should you invest in a tax-advantaged account, via your pension or a general investment account? These might sound trivial, but they make a real and significant difference to portfolio performance, because each will have different tax implications.

There are various tax shelter accounts (Pillar 2 and 3 accounts in Switzerland) set up by governments to encourage people to save and invest. They either have no or deferred tax liability, which will enable your portfolio to grow in a tax-free manner in the interim. Use them!

Still oblivious to the effect of taxation on your portfolio? It has been documented that even an additional 1% fee can exert a detrimental drag on long-term portfolio performance. Imagine the effect of a 25% capital gains tax!

 

Taxes are real expenses that act as drag on your portfolio. Having the right structure will enable your capital to grow in the most tax-efficient manner, allowing you to enjoy the maximum effect of compounding. Even a 1% saving can have a tremendous long-term effect as illustrated above, so choose wisely.

 

Don’t put all your eggs in one basket

The old saying “never put all your eggs in one basket” remains the key commandment in the investing world, even when investing in Swiss Francs, considered one of the world’s most stable currencies.

Diversification simply means having a selection of assets with uncorrelated risk-reward profiles. For example, adding some gold into an equity-only profile means that when equity takes a bashing, the gold should increase in value (due to its haven asset status). Research indicates that if you place 20 completely uncorrelated assets in a portfolio, then there’s little risk of long-term value erosion, because losses in one would be more than made up by gains in others.

Equally, diversification means constructing a portfolio that is wide-reaching. You may know the local Swiss market inside out, however, it will not help you if EU-Swiss relations break down and all of your assets remain in Switzerland. By investing in assets across the world, you can mitigate the risk of a specific geography.

Here are 3 easy ways to diversify your asset allocation and geography:

1. Use a multi-manager multi-asset class fund.

2. Purchase a selection of geographical and asset class specific ETFs.

3. Buy an international index fund (e.g. FTSE World Index).

Diversification reduces portfolio volatility and is essential for long-term growth.

A side effect of diversification is portfolio rebalancing. Due to constant changes in the underlying valuation of assets in a portfolio, the optimal asset allocation can never be maintained in the long-term. It is therefore important to periodically adjust (through buying and selling) to return to that optimal allocation. Due to the effort and fees that may involve, it is recommended to rebalance no more than twice a year.

 

Beware of fees & Costs

We saw the detrimental effect of fees on the long-term performance of a portfolio earlier: a 0.75% fee will reduce the terminal portfolio value by 17% at the end of a 20-year period. 

It goes without saying that any measures to minimise fees should be considered. Here are 3 easy-to-remember techniques:

• Use a fixed-fee platform rather than one based on the percentage of the net asset value.

• Use low-cost index funds (fees levied at no more than 0.25% per year) unless the active manager has demonstrated long-term outperformance. Remember, even that can turn sour very quickly as illustrated by Neil Woodford this year.

• Don’t overtrade – once you have invested (presumably using dollar-average), simply fire-and-forget and let the market do all the hard work.

 

Advisors, wealth managers or DIY?

Once you have reached the 1,000,000 mark, there will be no shortage of experts wanting a slice of your time to advise or manage your wealth. After all, money has the magnetic characteristic of attracting more money.

At some point, you will need to make a decision about the way your portfolio is managed. There are 3 main ways:

1. DIY

2. Wealth manager

3. Advisor

DIY is simple and free. You make all the investment decisions yourself and then execute. Technology has made trading so much easier that private investors today can access professional-level trading tools at a cost slightly more expensive than their morning coffee. The upside is that it is free and you will always have your own best interests at heart. However, you need to have a good understanding of the market as well as a level head, and you’ll need to devote time to your portfolio. In my opinion, it is the best portfolio management technique because nobody will place a greater interest in you than yourself.

Wealth managers, on the other hand, take over your portfolio and make all investment and trading decisions on your behalf. The upside of this arrangement is that it frees up your time and injects professional expertise into portfolio management. However, this can be an expensive approach (fees start at 1% per year) and their core incentive is really revenue maximisation for themselves rather than seeking the best performance for you.

Advisors sit somewhere in between DIY and wealth managers. They provide professional expertise to advise investors on where and how to make investments. However, the ultimate trading authority lies in the hands of investors, who can accept or disregard such advice. Advisors can be informal in the form of friends, or formal financial advisors regulated by the relevant authorities. Formal advice usually costs $200-$500 per hour. 

 

Always keep some powder dry

There are many qualities of Warren Buffett that contribute to his financial success. First and foremost, it is his patience and willingness to hold large amounts of cash for an extended period of time. Cash is what is known as “dry powder” in investing, because it allows you to put it to use (or “fire it”) when you need to.

Having some spare cash in your portfolio is always good because the nominal value of cash does not change and therefore it acts as a natural hedge that reduces volatility. However, the real advantage of cash comes into play during economic downturns when market fear irrationally depresses the valuation of sound and well-run businesses to below their intrinsic value. At that point, you could purchase these wonderful businesses cheaply, thereby increasing your margin of safety (and hence return). Buffett really understood the importance of this point and that’s why he aggressively bought into Goldman Sachs and Bank of America in late 2008.

Keep some powder dry as you might need it quickly (and it’s better to have it than not)!

 

Trust yourself & Shut out the noise

There is never a shortage of people who seek to project their opinion as loudly as possible. Unfortunately, in the digitally connected world we live in today, these opinions travel way faster than they need to, filling the time that people need to think for themselves.

My advice is to remove these distractions from your life, deploy what you have learnt about investing and listen to yourself. You understand your own circumstances better than anybody else and if that means running against the herd then do it. After all, nobody has ever lost money by not jumping onto the latest bandwagon.

 

Investment opportunities to consider

Now that we have a good understanding of the principles and practicalities of investing, we will look at the options available to ensure that 1M works as hard for you as it possibly can.

Here is an overview of the asset classes available to investors and their various properties.

 

Properties/Asset Cash deposit Bond Equity Real Estate Commodities Private Equity and Venture Capital
Overview Depositing capital in a regulated financial institution in exchange for regular interest payments. Lending capital to corporations or governments in exchange for regular interest payments. Direct or indirect ownership of public companies. Direct or indirect ownership of physical properties. Direct or indirect ownership of commonly traded raw materials (e.g. gold). Direct or indirect ownership of private companies or early-stage businesses.
Capital gains Nil Nil on primary markets; possible on secondary markets 8-10% per year for an index fund. Significant upside with the right growth model. 5-6% per year on average depending on the location and property type. Highly variable. Between -50% to 100%+ depending on the type and timing. Highly variable, can be 0% or 10x+ of invested capital.
Income potential Between 0-3% pa depending on currency and terms. Investment-grade bonds trading around 3-5% pa. Junk bonds at 8%+. 2.5% dividend yield per year. 3-5% rental yield per year. Highly variable depending on location. Nil Nil
Risks No risk if the deposit is within the protected limit (currently CHF 100K per individual per bank) Adverse financial performance leading to debtors defaulting on the loans. Adverse financial performance undermines the valuation and threatens dividend payment. Adverse economic conditions could reduce demand and drive down both price and yield. Highly volatile and vulnerable to swings in global demand and supply. High uncertainty in business performance (hence return). High chance of permanent capital loss.
Liquidity High if instantly accessible, otherwise a penalty might be incurred. Usually high as these loans are publicly traded. Usually high as these securities are publicly traded. Usually low as properties are illiquid. Can be partially mitigated through investing in REITs. Usually high as commodities are publicly traded with transparent pricing. Low
Transaction cost Nil Low Low Around 3-10% depending on the location. Low Around 3-5% of the transaction amount.
Management cost Nil Low Low 1% of the asset value per year. 1% of the asset value per year. 1-3% of the asset value per year.
Minimum Investment None Usually around $1,000 Usually around $1,000 At least $20,000 for an entire property or $1,000 for REITs. At least $50,000 for physical commodities or $1,000 for commodity ETFs. At least $100,000
Suitability Suitable as a short-term holding facility for your portfolio dry-powder. Unsuitable in the long term due to the erosion of purchasing power from inflation. Suitable as an income-generating engine of a portfolio. Suitable as part of any long-term investment strategy. Suitable as part of a long-term income generation and value preservation strategy. Suitable as a short-term portfolio hedge against uncertainty. Suitable for sophisticated investors not afraid of permanent capital loss of the invested capital.

 

Conclusion

1 million is a significant amount of capital, which, if invested wisely with the right objectives and time horizon, can deliver serious returns and propel you towards financial independence. As a summary, we will leave you with 3 principles that we hold dear:

• Simplicity over complexity
• Time is your best friend
• Fees kill returns

Happy investing!

11. August 2019

Investing 200K in Switzerland: Risks, Returns, Principles

So you’ve finally made it. The big 200,000 (CHF, USD, EUR) balance is sitting in your account after all those years of hard work, thrifty spending, and diligent saving. You’ve just entered the world’s top 5% club. Now comes the big question: How do I maintain my wealth? After all, in Switzerland’s low-interest environment, stuffing your cash under the mattress is a sure way to see its value erode quickly due to inflation.

Investing your cash properly is absolutely vital to propel you towards financial independence.

 


See also:


 

Determine your ultimate goal

It might sound cliche, but investing without having a goal in mind is like sailing to an unknown destination. You end up nowhere on the best of the days. Consequently, it’s vital to know what you want your portfolio to become in the future.

At the most basic level, there are two key functions of any portfolio:

  1. To generate a sustainable and rising level of income – This is ideal if you want to live off a passive income stream and achieve financial independence.
  2. To achieve real growth in the capital value of the portfolio – Usually this is for creating a sizable lump sum for a specific future endeavor (e.g. a home purchase or educational goal).

Depending on which goal you pursue, it will have different asset allocation implications. For example, income-focused investors would allocate greater capital to income-generating assets such as fixed income and dividend stocks. Whereas growth-minded investors would invest in high-potential growth stocks in Switzerland or globally.

Set your time horizon

Do you want to achieve your goal in 5, 10, 20 or just 2 years? Your time horizon is critical in deciding your asset selection. Generally, the faster you want to achieve a certain performance, the greater the return needs to be and hence the higher the risk level. As a result, your time horizon is directly linked to your risk capacity.

A good benchmark would be the long-term average return of the Swiss Market Index, which has delivered 5.82% Average Annual Total Return for the past 30 years. At this rate, your portfolio should double in value every 12 years.

Choosing the right structure

Should you invest in a tax-advantaged account via your pension or a general investment account? These might sound like trivial questions but the answer will make a real and tangible difference to portfolio performance because each will have different tax implications.

There are various tax shelter accounts (Pillar 2 and 3 accounts in Switzerland) set up by governments to encourage people to save and invest. They either have no or deferred tax liability, which enables your portfolio to grow in a tax-free manner in the interim.

Still uncertain about the effects of taxation on your portfolio? It has been documented that even an additional 1% fee can exert a detrimental drag on long-term portfolio performance. Imagine a 25% capital gains tax!

Portfolio Value From Investing $100,000 Over 20 Years

Diversification is key

The old saying “don’t put all your eggs in one basket” remains the key directive in the investing world.

Diversification simply means having a selection of assets with uncorrelated risk-reward profiles. For example, by adding some gold into an equity-only profile means in times of uncertainty, even though equity might be taking a bashing, the gold should increase in value due to its haven asset status.

Equally, diversification means constructing a portfolio that is wide-reaching. You may know the local Swiss market inside and out. However, it will not help you if EU-Swiss relations break down and all of your assets are in Switzerland. By investing in assets across the world, you can mitigate the risk of specific geography.

Here are 3 easy ways to diversify your asset allocation and geography:

  1. Use a multi-manager, multi-asset class fund
  2. Purchase a selection of geographical- and asset class- specific ETFs
  3. Buy an international index fund (e.g. FTSE World Index)

Diversification reduces portfolio volatility, which is essential for long-term growth.

What does this all mean in practice for a Swiss investor?

To put everything we’ve talked about into perspective, it may be helpful to construct several sample investment portfolios to see how they compare against each other.

 

Sample portfolio Cash portfolio Equity-bond portfolio Equity-bond-

property portfolio

Property-

precious metal portfolio

Description  100% cash or cash equivalents (e.g money market funds) 60% equity index fund + 40% bond fund 50% equity index fund + 25% bond ETF + 25% REITs 50% buy-to-let property + 50% physical gold 
Overall suitability Suitable if investors wish to take on minimum risk and not be worried about eroding purchasing power due to inflation

Key risk is the erosion of purchasing power from inflation.

Suitable for investors with a minimum 5-year time horizon and who will not need the capital during the period

Key risk would be short-term capital value fluctuation.

REITs tend to be less volatile than equity and bonds, therefore this portfolio is suitable for more conservative investors

Key risk is capital fluctuation and decreased liquidity which can happen during the times of extreme market turbulence.

This is a highly conservative and illiquid portfolio, which is suitable for investors who hold bearish views on the market and who prioritize income and capital security over other factors

Liquidity is the main risk to this portfolio.

Security tickers N/A Equity: global ETF, US ETF

Bond: investment-grade corporate ETF

REIT: Realty Income Physical gold ETF

Property: actual property

Income potential Depending on the currency, from -0.5% to 2% per annum 2.5% on equity,

4% on bonds,

Combined at 3.2%

2.5% on equity,

4% on bonds,

5% on REITs,

Combined at 4%

5% on property,

0% on gold,

Combined at 2.5%

Capital potential N/A 8% pa for equity,

3% pa for bond,

Combined at 6.5% pa

8% pa for equity,

3% pa for bond,

2% pa for REITs,

Combined at 5.5%

4% pa on property,

0-3% pa on gold

Risks Capital and income risks are negligible as long as the total amount is within the deposit insurance scheme of the country Equity: both capital and income (dividend) are subject to fluctuation and therefore aren’t guaranteed.

Bond: prices subject to change if not bought at issuance and held to maturity. Income (yield) may be subject to the default risk of the underlying operation of the issuer deteriorating

Equity and bond risks remain the same as before

REITs: their underlying asset is usually real estate, whose valuation can be more difficult to ascertain. During times of market distress and when faced with high redemption rate, managers will need to sell these properties quickly to meet investor withdrawal, which impacts pricing

Both property and gold are physical assets which are highly illiquid. As a result, during times of market distress, it can be difficult to convert them into cash without suffering a substantial drop in valuation
Liquidity High if an account is instantly accessible; otherwise difficult to access without incurring a penalty (or inaccessible) Usually high and traded on major exchanges Generally, REITs have high liquidity due to them being traded on exchanges. However, in times of distress, their liquidity will fall because the underlying asset is illiquid Low
Transaction cost N/A Low (less than 0.1%) Low (less than 0.1%) 1.5-2%
Management cost N/A ~ 0.5% pa ~ 0.5% pa ~ 1.5% pa
Stress test during a downturn The value of the portfolio should remain unchanged as it’s not subject to any market pricing effects If subject to the effects of the Great Recession, the portfolio nominal value may decrease by 25-30% within the space of a quarter If subject to the effects of the Great Recession, the portfolio nominal value may decrease by 15-20% within the space of a quarter If subject to the effects of the Great Recession, the portfolio nominal value may decrease by 10-15% within the space of a quarter

It is important to note that these are sample portfolios that have not taken the geographical allocation into account. In practice, where you place your assets is equally important. For example, the Swiss property market was barely affected by the Great Recession. Whereas neighboring markets suffered double-digit declines. It goes back to illustrate the importance of keeping a diverse range of assets across multiple countries.

Should you work with a wealth advisor or DIY?

By the time you have reached the 200 000 mark, no doubt all sorts of “financial advisors” and “wealth experts” will be looking to snatch a piece of your time. They’ll all be eager to help you to manage your wealth.

Whilst an entire article (and more) can be written about whether to hand over the control to these experts or do it yourself, here is a quick summary about each approach:

 

Approach Pros Cons
DIY
  1. Cheap > you don’t pay any management fees.
  2. Bespoke > you can manage the portfolio according to your exact requirements.
  3. Correct incentive > your interests are aligned with your portfolio.
  4. You may even perform better than professionals!
  1. Time-intensive > achieving above-benchmark performance requires dedication, diligence and learning.
  2. Easy to achieve underperformance if an investor is uneducated or inexperienced.
Professional manager
  1. Liberating > you don’t need to dedicate as much time managing your wealth so you can focus on other aspects.
  2. Expertise and performance > some professional wealth managers are very experienced and competent and can achieve outstanding returns.
  1. Expensive > most managers charge a % of the net asset value of the portfolio as a management fee. This is detrimental to investment returns once compounded over the long-run.
  2. Conflict of interest > some managers also receive commissions if they use certain investment products, which may not be inherently suitable to the needs of the investor.

Generally, if you are comfortable with the various terminologies of investment and have a decent understanding of the various asset classes and their respective characteristics, then it is a sign that you may be ready to manage (at least partially) your own portfolio. Otherwise, it may be better to use a professional manager who is compensated by the hour. Just be sure that they do not receive commissions from the underlying funds in your portfolio.

In conclusion

Others may tell you that investment strategy is too complex for the average investor. Yet it’s true that universal, underlying principles are extremely simple:

  1. Set your goal
  2. Determine your risk capacity
  3. Choose the right structure
  4. Diversify
  5. Let time do the magic

Compare it to nurturing an oak tree. It can be painfully slow initially, but once the roots have taken hold, almost nothing can tame its growth. Like the great oak, investing can also be a slow process that yields massive results over time.

31. May 2019

2019-20 Financial Crisis: are you prepared?

“It wasn’t raining when Noah built the ark”
– Howard Ruff

We’ve been in the longest bull market in recent history with ten consecutive years of stock market growth under our belt. Since 2008, a vast number of millennial have also entered the workforce and a sizeable of them became investors themselves. We are talking about a whole generation of people who are in the market and yet have never personally experienced a market downturn. It is therefore very easy to be complacent and extrapolate the wonderful performance of the past decade infinitely into the future.

However, history tells us that market cycles are repeating themselves. External circumstances may change and yet excess greed and fear remain constant, giving rise booms and busts. It is dangerous to make linear extrapolation using past performance and expect it to continue indefinitely.

We are at a stage where “peak valuation” is in sight. What often follows is either a soft (correction) or hard (crash) landing. But a landing nevertheless. It is therefore important to take measures and actively protect your portfolio no matter what the outcome is in the next 24 months.

In this post, we will walk through:

  1. Why do crises happen?
  2. Evidence that the next one is imminent
  3. Which assets are most at-risk?
  4. What can you do to mitigate the risk?

Note: We will be mainly referring to the US and UK markets in this article as they are the major market-drivers. The Dollar is also the main international currency.

 

Why do crises happen?

Recessions have been making regular appearances in our economic history for a variety of reasons (e.g. economic mismanagement, wars, diseases, human greed). For the past 120 years and with the exception of the two world wars, recessions in developed economies tend to be the byproduct of the boom-bust cycle, often fuelled by easy access to capital.

The most recent downturn (the 2007-09 Great Recession) was a classic example of the credit-fuelled cycle:

  • After the Dot Com Bubble, credit became readily available, reaching a peak in 2006 with subprime mortgage lending occupying 20% of total mortgage underwritten;
  • Asset prices (US property price specifically but financial assets in general) became increasingly inflated and often exceeding their intrinsic value;
  • This was followed by other investors entering the market in the hope of making greater returns (herd mentality), further pushing up asset price;
  • When subprime borrowers started to default on their mortgages en mass, as the teaser rates expired and the monthly repayment became unaffordable;
  • Lenders were suddenly faced with a book of bad loans, which led them to do 2 things:
    • Repossess these properties en mass: this led to a sudden increase in property supply without matching demand, cause a drastic fall in the US property price;
    • Tighten lending criteria across the board: often indiscriminately, which starved companies off capital and suffocating growth
  • The economic outlook suddenly became less positive than before, which caused investors to revalue their investment and started selling their holdings;
  • As selling continued, it became a self-fulfilling prophecy (due to herd mentality) and snowballed into a financial market crash.

In the aftermath of the Great Recession, the 3 most important central banks in the world (Federal Reserves, Bank of England, European Central Bank) deployed 2 key tools to stimulate the stalling economic growth:

  1. Quantitative easing (QE): the creation of “cash” by central banks to purchase financial assets, increasing their price levels and maintain market confidence
  2. Slashing interest rates: this lowered the cost of borrowing to encourage investors to take out debt capital and put them into productive use


How QE interacts with interest rates to stimulate growth? 
Source: BBC

The evidence: why the next financial crisis may be around the corner?

These 2 policies significantly increased the total liquidity in what was previously a stalling market. They were unarguably instrumental in the rapid economic recovery that followed suit. However, both instruments also led to a rapid increase (or recovery) in asset price across the spectrum because:

  • Significant demand-side pressure through QE
  • Negligible cost of borrowing (real interest rate was negative when compared to inflation in most developed markets), which further fuelled appetite for asset acquisition and exerted demand side pressure

As a result of over a decade of QE and low rates, most stock indices in developed markets have seen a rapid increase in valuation. This resulted in these assets being in a state of full price: intrinsic value plus market premium.

  • S&P500 index gained 260% between January 2009 and January 2019;
  • The Central London Property Index increased by over 100% between the trough in December 2008 and December 2017;
  • The Swiss Private Property Index displayed a steady performance between December 2008 and December 2016, increasing by 40%.

The sustainability of such valuation relies on the presence of 2 premises:

  1. An abundance of liquidity in the market (either through QE or low rate)
  2. Continued growth expectations

However recently there are signs that both factors are waning in today’s market, making the stock market valuation increasingly perilous.

The two factors that will lead to the financial downturn in 2019-2020

There are 2 streams of headwind facing most developed economies, which are threatening the growth that we’ve enjoyed in the past decade:

a) End of QE and rising interest rates
b) Inequality and the rise of social-political instability

Let’s explore these two points in-depth.

a) Rising interest rates and the eventual reversion to the mean in asset prices

At a simplistic level, when the debt/GDP ratio exceeds a certain point (between 100-200% depending on the country, the governor of the central bank and the macroeconomic climate), central banks tend to start tightening monetary policies in the form of raising the base interest rate. They will also start to impose stricter criteria on bank lending (e.g. which sector, what LTV ratio, etc), usually in the form of more stringent stress tests.

There are 4 key rationales behind tightening monetary policies:

 

  1. Central banks aim to keep inflation low: when economic growth gathers momentum, price level tends to increase, which leads to inflation. The base interest rate becomes the primary regulator as it cools down economic growth and central banks will have to bring it up in order to manage inflation.
  2. Controlled deleveraging: when the total debt within an economy exceeds a certain threshold, a large amount of the GDP will go towards interest payment, which is not the most productive use of capital. When companies pay an increasingly large amount of their profit to debt interests, it means lost investment in their employees (through training or better remuneration, which can be ultimately consumed to enhance growth) and lower tax revenue. Both are bad for economic growth.
  3. Central banks want to create an environment for greater capital allocation efficiency: linked to #2, a blanket low rate across all borrowing may not be channeling capital into the most productive sector, therefore by imposing more stringent/selective lending criteria, central banks can attempt to direct capital into the desired sectors.
  4. Central banks want to decelerate growth to prevent huge overheating, what will lead to even worse crises: investors believe that markets get nervous when the debt-to-GDP ratio exceeds a certain threshold and will automatically push up the cost of borrowing for governments, therefore central bankers would like to proactively decelerate growth to prevent overheating and enhance confidence.

The interest rate has historically moved in line with the debt-to-GDP ratio until recently
Source: ResearchGate

The overall effect is that at debt capital will become more expensive and difficult to access. The immediate impact would be a decrease in demand for financial and real assets, leading to a drop in their prices. If this is mishandled, it can lead to a vicious cycle where:

 

  1. Asset price decreases, leading to a drop in valuation;
  2. Debt-to-equity ceiling becomes breached, leading to less credit being available;
  3. Investment falls and income (profit) drops;
  4. Business becomes less valuable due to lower profitability, leading to a further drop in valuation;
  5. When magnified across the entire economy, growth stalls.


b) Inequality and the rise of social-political instability lead to the rise of populism and eventually to a greater economic downfall

The rapid asset price appreciation as a result of central bank policies had the unintended consequence of exacerbating economic inequality across developed economies. Three pillars contributed equally to this:

  • Increased asset price (induced by these policies) benefitted people with assets -> this meant the wealth gap between those with assets and those without were widened;
  • Increased asset price also made assets less affordable, thereby decreasing the probability of people without assets of ever acquiring them -> people already with assets could acquire them and end up with more assets -> wealth gap further widened;
  • Interest rate cut makes the cost of asset acquisition much lower than before. Borrowing at low rates became only accessible to people who already possessed assets.

So the poor become poorer, while the rich (who owned assets that went up) become richer.

“We have to be concerned about the wealth gap and the consequences geopolitically”, Ray Dalio

The link between rising inequality, growing social cohesion and by extension, political instability has been well-documented. Inequality fuels populism as we have seen with Brexit, the election of Trump, Salvini and the rise of AfD in Germany. Populist policies had historically been a headwind to long-term economic growth and therefore this decreases investors’ confidence in the future prospect of the global economy.

What will happen to your portfolio when the next tsunami hits?

Let’s assume that you find yourself in the midst of the next market downturn. What’s going to happen? What does it feel like? How will you react?

Let’s consider a hypothetical chain of events that might unfold in the foreseeable future:

  • After 2 years of chaotic negotiation, the UK crashed out of the EU without a withdrawal agreement, sending its entire economy into uncharted waters.
  • Sterling hit a 30-year low against dollars.
  • Protests in the street led to the resignation of Prime Minister May and a general election was held, leading to Jeremy Corbyn, a staunch socialist, being elected.
  • Business confidence plummeted as a result and corporate investment fell.
  • Amidst the chaotic political scene, much of the EU derivative contracts underwritten in London became legally unenforceable, causing massive losses to holders.
  • Market confidence plunged and the FTSE 100 was is down by 15% at the end of the week and 30% by month.
  • The UK economy suffered a sudden slowdown and was manifested across the EU due to the strong trading relationship historically.
  • The slowdown in the EU, in turn, spread across its own trading partners around the globe.
  • Investors began to cast doubt about the health of the global economy and major indices suffer dramatic falls and are down by 25% by the end of the month.

In this hypothetical case, here is the potential impact to your $100,000 portfolio, which is made of geographically and sectorally diversified ETFs, comprised of the classic 60-40 equity and bond combination:

  • The equity portion of your portfolio will drop by 25% from $60,000 to $45,000;
  • The bond portion will more resilient but can still drop by 15% from $34,000;
  • As a result, your portfolio will now be worth $79,000, suffering a 21% depreciation
  • Corporate earnings may be slashed during a downturn, directly impacting dividend payout. It is entirely feasible to see a more than 15% drop in the dividend growth rate.

These are real and nominal losses in income and valuation respectively, which can affect investor psychology profoundly and cause them to panic sell, that in turn, exacerbate the drop in the market.

What can you do to insulate your portfolio now?

The easiest way to preserve your portfolio value during a downturn is to diversify your risk concentration before the market fully appreciates the risk.

Looking across the risk spectrum, in an ideal world, we need an asset that fulfills the following 2 criteria:

  • Located in a jurisdiction with high political, economic and legal stability as well as a favourable business environment. These factors are important for value preservation;
  • Capable of stable and increasing income generation, which will enable value enhancement.

Swiss real estate immediately springs to mind.

As a nation, Switzerland is blessed with some advantageous characteristics:

  • It is a small, stable and neutral country;
  • It hosts a highly advanced economy;
  • As a nation that enjoys strong bilateral ties with the EU and accepts freedom of movement, it is enjoying above-average population growth;
  • Total tourist arrival per year has been increasing consistently at 3% per year, even during the Great Recession.
  • The supply of properties is relatively inelastic (limited stock availability), therefore the average nightly rate will increase when faced with rising demand, enabling increasing income potential.

The Swiss property market has historically enjoyed balanced growth. Lately, it has seen a more aggressive trajectory due to the factors outlined above. Equally due to the strong demand-side support, the property price has remained stable, even during the Great Recession, which makes it an attractive hedge against market volatility elsewhere.

Looking at the historical performance data, the return and volatility of a mixed-class portfolio (with cash, equity, and bond) with or without a Swiss real estate component differ significantly. What it emphasizes is the hedging role the property plays in the portfolio: it reduces the amount of risk for a given level of return (the flip side of the coin is that it enhances the return at a given risk level). This is because research has demonstrated that Swiss real estates show little correlation (0.1) with other major assets, making it an ideal risk hedge. It also means that in the event of major market price movement, the value of your portfolio will remain relatively constant due to the value-preservation nature of holding Swiss real estate.

How do I get exposure to the Swiss property market?

There are a few different approaches and the exact methodology depends on investors’ personal preference and circumstances.

 

Asset Entry barrier Capital return /  profit (pa) Capital protection Yield Liquidity Transaction cost Maintenance cost Example
Physical property CHF 200k min up to 4% Physical property <2% Low 1% 0.5-1.5% Any Swiss realtors
Fraction ownership in a real estate -related business CHF 50k N/A Physical property Up to 7% – 14% Low 0% 0% Le Bijou Owner’s Club
Real Estate Funds CHF 1k 3% Collateralised against the property 2% – 3% Low: if close-ended

 

High: if openly trading

0.01-1% 0.5-2% SXI Swiss RE Funds
Property bonds CHF 10k 0% Collateralised against the property 2% – 6.5% Low 0% 0% Le Bijou Bonds

 

Conclusion

We have enjoyed been enjoying a decade of extraordinary returns on the financial market. Such a long period of stability can often cloud our judgement and make us believe that this is the norm. Yet history tells us that this is far from the truth. The financial market is volatile and there are warning signs across the spectrum that a downturn might be around the corner. Fortunately, there are numerous options available to investors in today’s market to facilitate risk reduction whilst enjoying balanced return on their capital.

Source: the article was originally published at Starwerk.ch

 

 

1. February 2019

A quick and comprehensive guide to bond investing

In the last article, we explored the various asset classes available to retail investors in today’s climate. We ended on a note that bonds, especially ones backed by an income-generating asset, strike a good balance between capital security and real return.

Today, we will dive deeper into the bond world and explore what makes bonds so attractive and what types of bonds investors should be aiming for when searching. After all, the US bond market alone larger than the entire global equity market capitalisation combined, therefore it is crucial to pick the appropriate instrument that fits your personal risk profile.

 

What is a bond?

Bond is derived from the English word “to bind”, which creates a binding instrument for one party to pay another. In the modern financial world, a bond represents an obligation for the borrower to pay the lender under terms stipulated on the bond instrument.

To retail investors, their most direct encounter with bonds probably lies with the mortgage on their houses. In this case, banks lend homeowners a fixed amount at an agreed interest rate to purchase the house. In return, homeowners repay a certain percentage of the loan (plus interest) every month for the duration of the mortgage.

 

Why do bonds exist?

The distinct advantage when buying an asset using capital (cash) derived from bond issuance is that the borrower retains 100% ownership (equity) of the asset. Imagine instead of issuing you with a mortgage in the house purchase, banks offered you equity investment. It will mean that part of the house will be legally owned by the bank.

What a messy world it becomes!

By using borrowing, it simply means that as long as the borrowers keep up with the obligations outlined in the bond (usually the monthly payment), ownership of the asset remains 100% with the borrower.

Bond is a type of financial leverage that enables investors to punch above their weight and buy assets that were previously out of their reach. It is fundamental to the health of our economies and that’s why there exists a multi-trillion market for it.

 

Why invest in bonds?

Bonds offer return on capital in the form of interest (coupon) payment at a rate stipulated in the issuing instrument. It is fixed and it rarely changes. This makes it an attractive option for investors who seek regular income streams at predictable intervals. In fact, bonds are often called “fixed income instruments” in the financial world.

Bond return is judged on a concept called yield, which is a glorified way of saying interest rate.

Yield (expressed in %) = Total annualised income / Total capital invested

Logically the higher the yield, the more income is generated and naturally the greater the return on capital.

Bondholders usually would continue receiving coupon payments for the duration of the bond holding period. In the end, however, capital is returned to investors in its entirety, without deduction or addition.

Furthermore, bondholders enjoy liquidation preference over equity owners, which means that in the event of bankruptcy, all assets of the company will be sold (liquidated) and the proceeds will be used to redeem bondholders first. Any residuals can then be reimbursed back to equity holders.

Bondholders can even demand an even greater level of capital protection through collateralisation, in the form of secured bonds. In this instance, there is a designated asset (e.g. a house) that serves as security for the debt. Any default events will see bondholders seizing the asset for liquidation and capital recuperation.

This is the central feature of bond: in exchange for capital security, the capital does not appreciate and all returns are earned in the form of coupon payments.

 

Types of bonds

There are several different approaches to classify bonds. Typically they are broken down by the institution that issues them (issuer).

 

Source: InvestingAnswers

 

How bonds behave on open markets?

Given the size of the bond market and its numerous participants, it is important to understand how bonds behave.

Bond investors really only worry about 2 things:

  • Capital security: am I going to get my money back at the end?
  • Return on capital: am I achieving the best yield?

These 2 factors are intricately linked.

Assuming an investor buys a sovereign bond issued by a reputable government (e.g. US Treasury Bills, UK Gilts or Swiss Government Bonds) with a AAA credit rating at par value (i.e. the nominal face value on the bond instrument), it is extremely unlikely for the issuer to default and as a result, the capital security of these bonds is guaranteed. Consequently, the coupon rate (i.e. yield) on these bonds tend to be lower (sub 2% per annum), in order to reflect the decreased risk level borne by the investors.

However, most investors do not buy bonds at par value (i.e. on issuance), but in secondary markets where these instruments are actively traded every day. Here a third factor comes into play and that is the base rate.

Imagine a 20-year term bond has just been issued at 3% coupon with a par value of $100, whereas the base interest rate at the central bank stands at 1%. That means that investors will receive $2 more per year by investing in the bond versus holding the cash as bank deposits. As these 2 assets are perceived to both offer risk-free return, investors would rather park their capital in the bond than the bank deposit, in order to enjoy the superior return.

As demand for the bond begins to outstrip supply on secondary markets (remember the par value will always remain unchanged at $100), the cost of acquiring the bond begins to increase and it can exceed the par value. This is because investors expect the bond return will outstrip deposit return over the long-run, thus delivering better relative value. As a result, they do not mind paying slightly more upfront. The increase in bond price would push down the yield because the absolute income level generated remains unchanged.

Now imagine that the central bank decided to raise the base rate to 4%. Now suddenly bank deposit would generate $1 extra per year over the bond. This instantly decreases the attractiveness of the bond and would cause capital outflow from the bond into the deposit. This decrease in demand pushes down the bond price, which then causes the yield to increase. This, in turn, restored the price equilibrium.

As a result, in addition to capital security and yield, bond price on the secondary market is also intricately linked with the future expectation of central bank interest rates. The greater the expected difference, the greater the bond price movement.

 

Bond price tends to move in opposite direction to interest rate

Source: Fidelity

 

What happens when bonds default?

In life, the unexpected will happen and it always helps to be prepared. When borrowers (bond issuer) fail to adhere to the terms of the bond (usually paying on time), they default. There have been some high profile default events over the past few years:

 

During a default, bondholders (creditors), given their liquidation preference, have the option to apply for court orders to legally liquidate all assets owned by borrowers and attempt to recoup their capital and accrued interest.

However, this may not always be the optimal route when the current assets of the borrower are less than the amount owed. This is especially the case if the borrower is an actively trading business that is generating consistent cash flow. Under these scenarios, it is in the overwhelming interest of both bondholders and shareholders to see the business continue trading rather than having all of its assets immediately seized and liquidated. This way, bondholders can use its cash flow to redeem the outstanding loan whilst shareholders’ equity value is preserved.

In such instance, a process called debt restructuring may occur where the original terms of the debt are modified into more favourable ones that are mutually acceptable by both bond and shareholders. This maintains shareholders’ control of the business whilst ensuring bondholders continue to receive their coupon and capital payments. Debt structuring can only be used by borrowers with consistent cash flow and ideally valuable assets (e.g. properties, machinery) that may serve as collaterals.

 

Property-backed bonds offer a unique combination

From the information detailed above, it is evident that the key features of an attractive bond are:

  • Higher yield relative to its peers and the central bank rate
  • Collateralisation against valuable and marketable assets
  • Borrowers’ ability to generate regular cash flow

As a result, rental properties offer a natural habour for bond investors.

Rental properties can be bought by a limited company (a special purpose vehicle or SPV), which in turn issue bond instruments to fund the purchase. The SPV then uses rental income from the property to make coupon (or a mix of coupon and capital) payments to its bondholders. Given that bondholders can hold the first charge in the title against the property, it means that in the event of default and the property is sold off, bond investors will be first in line for the payout. This significantly reduces risk exposure.

There are 2 conditions when assessing RE-backed bonds:

  1. Underlying rental yield: this must be higher than the coupon rate of the bond as otherwise, coupon payment will become unsustainable;
  2. Loan-to-value (LTV) ratio: this is a measure of indebtedness similar to the debt-to-equity ratio in companies. A 60% LTV ratio means the total outstanding loan on the property represents 60% of the current property value. Put it another way, given that bondholders hold the first charge, the property value will have to fall by more than 40% from its current level for bondholders to start losing their capital, should a liquidation occur today. As a result, the lower the LTV, the greater the capital security.

 

How does it compare to other bonds?

 

Type Example Grade Yield to maturity Capital fluctuation Default recovery
RE-backed bonds LB bonds Ungraded 5.2% None Backed by properties as collateral
US Municipal California Affordable Housing Agency Bond Ungraded 4.4% -2.5% since the commencement of trading Not backed by any assets but instead the municipality’s taxing power
UK Gilt UK 10-year Gilft Aa2 Stable 1.2% Trading at 25% above par value currently Unlikely as the UK has never defaulted and enjoys the highest credit rating
Swiss Corporate Credit Suisse Group Funding Baa2 (Investment Grade Medium) 0.54% Trading at 1% above par value currently Not secured against company assets but creditors may make claims against them through court if default occurs.

 

As one can see from the table above, RE-backed bonds enjoy a unique combination of:

  • High yield to maturity;
  • No risk of capital fluctuation due to it not being publicly traded;
  • Ease of capital recovery during default rather than having to go through an onerous bankruptcy process;
  • Capital recoverability during default is more certain given that most LTV do not exceed 60%, whereas other bonds do not enjoy such benefit.

 

In conclusion

Bond investing occupies a happy intermediate between capital security and real return on the capital. When secured against income-generating real estate assets, its return profile can significantly exceed the risks entailed, thereby making it an attractive investment choice.

7. January 2019

Low-Risk Investments in Switzerland: How to get returns above 0%

You’ve done the hard work and built up a sizeable portfolio. Now, where should you invest your hard-earned cash so it keeps working hard for you?

One of the perpetual problems facing investors today is the ability to find assets with decent risk-adjusted returns without exposing yourself to the risk of permanent capital loss. The smaller is the portfolio, the harder is it to achieve reasonable returns with acceptable risk.

At this range, the amount of investable capital is significant enough to hurt investors in the event of a loss. The capital is likely to be the result of years of saving and frugal living. However, at this level, the cost of seeking professional investment advice can appear exorbitant (up to 3% of the total portfolio level). Investors are essentially stuck.

 


See also:


 

Low-risk investing in Switzerland is difficult

It is worth going back to square one and to consider the purpose of investment: investing is to maximize real return whilst minimizing the chance of permanent capital loss.

Real returns mean that the financial gains derived from the asset (in the form of income yield and capital appreciation) must exceed the rate of inflation. This will lead to an enhancement in purchasing power.

Permanent capital loss is usually a result of failing to account for the risk of a particular asset, thus leading to the inability to recoup the initial capital outlay within a reasonable timeframe.

I have a rather extreme personal example.

Three years ago, I invested some spare cash into a startup company which promised to revolutionise the realty agency model. Looking at industry comparables, if it could achieve half of the scale its transatlantic competitor did then it would have delivered a 15x return on my capital.

Unfortunately, things didn’t quite work out that way. A few days ago, I received an email from the management informing me that the company had entered into administrations and it’s unlikely that investors would be able to recoup any of its investment.

Thankfully I only put in some pocket money so no hard feelings. However, this is a clear illustration of the return-capital loss paradox. Whilst the upside of this asset may be huge, it is underpinned by 2 critical risk factors:

  • Capital risk: the asset in question was equity (shares) in a startup company. In the event of bankruptcy (whose probability is quite high), shareholders are last in line to receive a payout, if any.
  • Liquidity risk: the shares in the company are not publicly traded. As a result, it is incredibly difficult to turn it into cash within a short time without suffering a significant loss of value, because not many people have the skills to value, let alone the risk appetite to purchase.

Investors today are confounded with these 2 critical risks. Additionally, not many possess the know-how to accurately gauge the risk-return trade-off. Consequently, this often led to poor investment decisions being made, based on gut instinct and information asymmetry.

 

Low-risk investment options overview

Suppose you have a 50,000 EUR/CHF/USD cash portfolio, saved over from many years. What are your realistic asset choices for investment?

There are 3 broad asset classes available today:

  • Cash
  • Bond
  • Equity

 

Risk Reward across Asset Classes

Risk reward ratio across different asset classes

 

Comparison of different asset classes by returns and risks

 

Asset category Asset Capital return (per annum) Income return (per annum) Capital risk Liquidity risk
Cash Instant access savings Nil <1% Nil, up to the deposit insurance coverage level Nil
Cash Termed deposit Nil 1-3% depending on the term and currency Nil, up to the deposit insurance coverage level Medium
Cash Money market fund <1% <1.5% Low Low
Bond Treasury bond <2% 0.5-5% depending on the term Low Low
Bond Municipal bond 3%+ depending on the grade 2-6% depending on the municipality Low to medium depending on the municipality (think about Detroit) Low
Bond Corporate bond 3%+ depending on the grade 2%+ depending on the grade Low to high depending on the individual company Low to medium
Bond Peer-to-peer lending Nil 5%+ High High
Bond Real estate bond Nil 3.5% – 5% Low to medium, depending on the type of the bond and real estate Medium
Equity Dividend stocks 4-6% 1-2% Medium Low
Equity Growth stocks 10%+ Usually less than 1%, if any High Medium

 

As the above chart illustrates, cash and cash-like assets tend to have low return coupled with fewer risks and higher liquidity. On the other end of the spectrum, equities have high growth rate and above-inflation dividend yield. However this is counterbalanced by increased volatility and risk of capital loss.

 

Bonds, however, combine the above-cash return with a much lower risk profile. This makes bonds an ideal middle ground for investors with low risk appetite.

 

Real estate bonds become attractive under the current climate

Bond is derived from the English word “to bind”, which creates a binding instrument for one party to pay another. In the modern financial world, a bond represents an obligation for the borrower to pay the lender under terms stipulated on the bond instrument.

 

Here are some of the key characteristics of modern bonds:

  • They do not represent ownership, but merely for the borrower to pay the lender under a specific set of conditions defined by the bond;
  • They provide a fixed rate of return in the form of coupon payment (i.e. interest) to investors at regular intervals;
  • Capital is redeemed at the end of the term;
  • Bonds can be secured against certain assets (collaterals) but don’t necessarily have to be;
  • In the event of default (borrower failing to observe the conditions of the bond), the lender has the right to seize assets and liquidate them to recoup the capital and interests, before any shareholders.

 

There are 2 ways to earn returns when it comes to bond investing:

  1. Coupon payment: each bond has a set interest rate (called coupon) that is paid out at regular intervals (monthly, quarterly or annually). This is the primary way and that’s why bonds are often called fixed income investment.
  2. Capital price appreciation: bonds represents an obligation between the borrower and the lender. Each bond is sold and redeemed at the face value of the bond (aka par value, usually in 100 EUR/CHF increments). It is possible, under certain situations (e.g. changing interest rate, alteration in the financial health of the issuer) for the market value to deviate from the par/face value so that you can buy it at a low price and sell it at a higher one later. In fact, just the US bond market size alone is larger than the entire global equity market combined together. However, these are highly specialized situations and retail investors tend not to personally trade bonds too often.

 

Bondholders have a preference over shareholders, which is manifested in 2 forms:

  • Regular and uninterrupted interest payment (whereas equity dividend is an option rather than obligation);
  • Liquidation preference over shareholders in the event of default.

 

These 2 features enable bonds to carry a different risk profile versus equity:

  • Equity valuation is a product of expectation on current and future profitability;
  • Bond price is more dependent on the strength of the balance sheet and the current cash flow of the business

Given that balance sheet and cash flow are much easier to measure than future profitability, bonds tend to be less volatile and are perceived to be a lower risk asset class than equity.

 

The special case of Swiss property-backed bonds

Until recently, property and bonds were two words only institutional investors had the privilege to be associated with. These were mega-deals that had an entry ticket in the millions of $, which were simply out of reach for most retail investors.

 

Yet due to lowering costs of transaction, securitisation and funding, thanks largely to technological advancement, these entry barriers are beginning to be broken down.

 

It is now possible to:

  • Establish a limited company (special purpose vehicle or SPV) in a respectable jurisdiction within a few hours;
  • Use the SPV to issue shares and bonds to potential investors to fund the purchase of a property;
  • Buy properties, receive rental income and sales proceed using that SPV.

 

This has enabled the securitisation of the property market and thus vastly opened its access to retail investors. Investing 1 million EUR/CHF in an apartment may sound like a lot, yet when it is broken down to 10,000 shares valued at 100 EUR/CHF each, suddenly most mortal souls can start building their own property empires.

 

Hence we come to property-backed bonds.

 

An SPV that holds and lets put a property is just like any other businesses, which owns assets to generate revenues, costs for operating and financing of these assets and hopefully, it will make a profit at the end of the day.

 

To acquire these assets (i.e. properties), its shareholders can decide to partly fund it themselves (through equity) and partly issue bonds to borrow money from investors. They then pay out a fraction of the rental income to bondholders as coupon payment and retain the rest as profit. This way, shareholders do not have to commit a huge upfront capital payment for the project, which lowers their financial risk.

 

It’s a pretty sweet deal for bondholders too:

  • They receive a regular and predictable return on their capital without fail -> currently yields around 3.5-5%, which is inflation-busting;
  • Due to the securitisation nature of the product, the minimum investment level can start from as low as 10,000 EUR/CHF -> this significantly lowers the barrier of entry and opens up to many retail investors;
  • It provides an easy and efficient manner for investors to diversify the location and class of their asset base, due to the lower entry barrier;
  • Bonds are secured against the property, which means in the event of default, bondholders have the right to seize the house from shareholders and auction it off. They will be entitled to the proceeds first;
  • The amount of bond as a % of the house value (loan to value ratio) is kept at a sensible level (60%), which means the property can withstand a 40% drop in market value without affecting the capital security if bondholders.

 

The only potential drawback between a bond of this nature versus publicly traded equities or bonds is liquidity. In other words, the ability to turn the investment into cash quickly without value erosion. Given such bonds tend to be privately issued and subscribed, the expectation is that they would be held to maturity. As a result, no markets exist for the trading of such instruments and therefore the liquidity risk is high.

 

In conclusion

The array of investment options available to today’s investors can indeed be confusing. However, when pierced through the haze, it is easy to see that bonds secured against valuable collaterals offer the perfect combination of inflation-adjust return and low risk to the capital.

 

7. January 2019

Le Bijou Investment: Returns Potential and the Underlying Business Model

“There are two ways of being happy: We may either diminish our wants or augment our means.”― Benjamin Franklin

The quote above carries the truth behind the need for making investments. Whenever you have wealth, it’s important to seek ways to grow it. Otherwise it will diminish with time – that’s the burden that comes with wealth.

Real estate investments created more billionaires than any other industry in history. The need for housing is one of the basic human requirements and will never go out of style – just like the need for energy, clothing, transportation and communications. Although, unlike many other industries, real estate is much more stable and mature. It’s hard to think of a disruptive innovation that would bring property out of the playing field. In fact, some people still live in houses built during the 16th and 17th centuries and often consider them a luxury.

 

Le Bijou capitalizes on recent changes in the hospitality industry

It’s common even for mature industries such as real estate to find new ways to evolve and grow. Le Bijou has identified one such way and it’s early enough to build a lucrative business model based upon this niche.

 

Dropped entry threshold and the increased importance of high-quality service

After the invention of the internet, things started to change, especially in the hospitality industry. Online booking platforms such as Booking.com re-shaped the way people think about hotels. The importance of brand awareness dropped dramatically – virtually any boutique hotel could now compete with industry giants as equals, without the need to put billions into advertising. As Amazon Founder Jeff Bezos puts it: “In the old world, you devoted 30% of your time to building a great service and 70% of your time to shouting about it. In the new world, that inverts.”

 

The struggle for privacy

Now consumers have become overwhelmed by constant, brief social interactions with people they don’t know and probably will never meet. Privacy and the freedom to choose whether we want to interact with others or not is now a luxury few can afford. When traveling, there’s nothing pleasant about the check-in process. Most people do not enjoy sharing the elevator with other guests or stumbling upon (rich) strangers in the lobby.

The appearance of AirBNB was another shake to the hospitality industry. Not only did it bring independent homeowners to the market, but it also impacted consumer tastes, as it perfectly matched the increased need for privacy.

We were operating a small apartment through AirBNB in 2013 when we realized that almost half of our customers were high-spending, sophisticated visitors. We found they preferred this type of travel booking because:

  • They liked the privacy and convenience of renting out the whole apartment.
  • They felt in full control of the place.
  • They didn’t have to interact with anyone, including reception and security personnel.
  • They would never have to stumble upon another guest in the lobby.

Overall, the experience was more like staying in a private apartment; more like home and less like a hotel.

 

The underserved luxury customers and Le Bijou’s concept

Even though AirBNB apartments are widely available, luxury consumers are rarely satisfied. AirBNB properties are seldom operated professionally and lack the amenities that a 5-star service would provide – concierge service, great design, professional operations, and a guaranteed level of service. Many travelers expect to rent the whole floor. And most importantly, many guests weren’t excited by the idea of staying in someone’s private apartment that could be accessed by the homeowner at any time. They needed a brand and an institution they could trust. Something that would maintain their desired level of privacy while upholding the emphasis on service they received with traditional bookings.

 

Steve Wozniak, co-Founder of Apple, about his stay at Le Bijou:

 

 

That was the beginning of Le Bijou. As soon as we realized that such a lucrative segment as luxury consumers is underserved, we saw a great business opportunity. We came up with the concept of a modular hotel that would combine the convenience of renting out whole apartments with the prime services and safety of 5-stars hotels. We invested in the first units and since then, we’ve managed dozens of apartments in Europe, working with our own capital, also by banks and private investors.

 

What is Le Bijou?

Le Bijou is a modular, high-end hotel that operates in major Swiss cities with plans to expand to the world’s largest trade and business centers.

Le Bijou’s units are large apartments in prime buildings in the central areas of each city. Every apartment has a unique interior design, top-class amenities, and a great view. Even taking up the whole floor is an option.

All the services that a 5-star hotel would provide are at the visitor’s fingertips: James, our digital butler (backed by artificial intelligence) and the face of our sophisticated concierge service, can handle anything a customer might want, whenever they want it – be it private dining, events booking, transportation or security services.

 

Service Apartments, möblierte Mietwohnung Le Bijou

Inside one of Le Bijou Units


Le Bijou occupancy rate is usually between 75% – 85%. We plan on opening dozens of new units in Switzerland to face increasing demand, and we expect to move next to other major business centers across the globe, including London, Dubai, Hong Kong and New York.

We leverage both institutional and private capital to finance our expansion, and offer two types of investments for retail investors who would like to participate in the growth of our business.

 

How does it work from the financial perspective?

Le Bijou is looking for apartments in the center of Swiss cities in the most desirable locations. We buy or rent them, create luxury interior designs and then rent them out for short-term stays.

Those apartments are financed by a combination of Le Bijou’s own capital, private investors, and banks. Private investors can invest in bonds backed by real estate or in equity form by becoming a co-owner of a profit-generating Le Bijou franchise unit, to potentially receive correspondingly higher returns.

Bond – a type of investment in which the investor receives a guarantee for making a profit; a pledge secures this guarantee.

Equity – what a shareholder owns in a company, entitling him to part of that entity’s profits and a measure of control.

Buying bonds with Le Bijou means that the investor buys shares, giving them the opportunity to earn profit from the rental. The benefit of a bond is its guarantee of income. Those shares are secured by property that is rented, and if (in a case of force majeure) an investor doesn’t receive 3% fixed profit at the end of the indicated period, then the security will be sold and the invested money is returned to the bondholders.

In the model with equity, Le Bijou franchise unit rents real estate for the long-term (up to 20 years), creates luxury interior designs and sets up the marketing channels for these apartments. The ownership of the renovation, lease agreement, and all the financial flows are transferred to a separate, newly created independent company (the Le Bijou Owners Club, an operational company that franchised the Le Bijou system) and the shares in that apartment are sold to a group of investors. These investors then would earn dividends – everything this apartment would earn minus operating expenses. In this embodiment, income is not fixed as in the case with bonds, but its earning potential is significantly higher and may reach 21% per year.

Le Bijou gains profit in the following ways: it retains 10% of property shares (to be able to participate in future discussions regarding the development of projects) and also receives a 20% fee from the revenue. This way, by holding 10% of the shares, we are even more incentivized in the success of the investments we manage: Le Bijou only receives dividends after the capital contribution has been paid.

 

A closer look at the investment model

 

What is the profit dependent on?

To understand what determines profit for investors, we should first understand who our customers are.

They can be divided into three groups:

  1. Tourists, local and international for both business and leisure
  2. Companies and business people who rent apartments for meetings and corporate events
  3. Agencies that rent apartments for private events

 

An obvious conclusion arises here: since tourists are not our only guests, we are less susceptible to seasonality than hotels, which in turn, makes our income more stable.

Often, our apartments are booked by event agencies who need a premium location for creating the right atmosphere. Therefore, our marketing strategy includes promotion among corresponding agencies.

Another advantage of this model is that the investors are not liable for their investments with their own assets, as is often the case when working with crowdfunding services. Most crowdfunding services use bank loans to leverage the purchase and the investors are liable for it with their own assets (i.e. house, cash, etc).

With Le Bijou, with the equity investment, you don’t own the property itself (we only lease it for 20 years), so you are indifferent to its price volatility. Moreover, there’s no bank leverage, so there’s no pledge involved. Therefore your shares and personal assets cannot be taken by a bank in any case.

With the Le Bijou real estate bond, you are still not liable for anything, as a bond is just a guarantee of the company to return your money back with interest.

 

Differences from other hotel investments

Most hotels have a common challenge – seasonality and the corresponding jumps and lags in business. In our case, this problem is solved through the Le Bijou diversified structure of demand (as described above) and by choosing locations in prime areas of major cities, where we can count on business visitors year round. Whereas a typical hotel is bound to renting the whole building, something that is rarely available in central areas, we can also work with small properties such as single apartments or former office buildings.

Managing a traditional hotel means one has to have a bigger overhead and hire full time employees. The need to pay salaries for hundreds of employees decreases the price flexibility, whereas with Le Bijou, we work with a carefully curated selection of independent contractors and carry almost no fixed monthly expenses. Fewer people, fewer worries, fewer risks all add up to a stronger type of investment.

Additionally, Le Bijou’s different investment models each have their own advantages over investments in the hotel industry.

 

Bond investment model advantages

  • Your investments are secured by real estate and you receive a guaranteed income without the dependency on seasonality or managerial overhead.

 

Equity investment model advantages

  • This type of investment is much less capital intensive, as we don’t buy the property – we just lease it. You do not carry the risks of owning the real estate and thus are indifferent to its price fluctuations
  • Your investment is not leveraged by the bank. What that means is that ownership cannot be taken from you under any circumstances, which is always possible if a bank participates in the deal.

 

Differences from traditional real estate investment funds

The main distinctive features of investment funds (access to institutional investors and going through a fund manager) actually are the cause of its biggest weakness: they are spending a lot on expensive management teams and their overhead eats all the profits. Fund managers earn money all the time, while the investors’ profit varies.

Real estate funds usually have an appetite for large properties, so the cost of due-diligence (sometimes as high as a few hundred thousand USD) won’t be too high, relative to the cost of the building. This is a good approach for growing markets, where there are many new developments. But in mature markets, there is much more focus on the financial proposition than the demand for money, so multiple funds bid against each other for investment properties. The property owners increase the price and it draws the profits down. Where there is a lot of competition, there is little profit. The real opportunity lies in a mid-market segment, which is yet unavailable for retail investors but too small for institutional investors.

Not only do these types of funds miss the opportunity to work with smaller properties, but they are also inflexible and thus unable to nimbly work with short-term rentals, which provide the best returns.

Recently, the returns of real estate investment funds have not been great because profit is not guaranteed. Only 9 out of 141 listed funds at Swiss Fund Data yielded more than 3% in the last 12 months at the moment of writing of this article.

Our approach is radically different. We focus on properties in central areas of the biggest cities that a fund or even a hotel won’t consider because of their size, yet they are still not available for retail customers. We lease these properties at a discount, which the landlords are willing to provide because they trust our company. We then rent them out for short-term; it is a much more lucrative business model. We don’t have fixed commissions and our reward is proportional to investors’ earnings, so we don’t eat up the investor profit.

 

Bond investment model review

When investing in bonds, you not only get potentially higher returns than in most funds, but these returns are fixed – the amount of payments is guaranteed. Le Bijou bonds yield 3% – 5.2% fixed annual profit (dependent on the size of the investment).

 

Le Bijou Bonds Model Explained

 

Performance comparison of Le Bijou bonds, Government Bonds, and Bank Deposits. X axis: years, Y axis: worth of 100 CHF initial investment. Le Bijou bond yields 5.2% p.a., government bonds that yield -0.5% p.a. (at the moment of writing, bonds with different maturity yield from -1% to 0.5% p.a; source: Swiss National Bank), and bank deposits that yield 0% (most Swiss banks offer rates from -0.5% to 0.5% p.a.). We assume that all the profits are being reinvested.

 

 

Equity investment model review

You do not risk having ownership of real estate, so you are indifferent to its price volatility; the investor doesn’t care, even if the market is at its peak. There is a massive difference in possible income: instead of 1-3% fixed profit, you may get up to 21% annually.

 

Le Bijou Owners Club

Le Bijou Owners Club Model Explained

 

Swiss Equity Investments PerformancePerformance of the assets with flexible returns, if profits are reinvested each year
X axis: years; Y axis: worth of the initial investment of 100 CHF, CHF

 

 

Switzerland Tourism Arrivals and Revenues

Switzerland’s tourism arrivals and revenues show a positive trend for the last 30 years, almost unaffected by global turbulence and crises. Quarterly revenues – CHF, mln (LHS); Tourist arrivals by quarter, thousand, (RHS). Source: Swiss National Bank, Tradingeconomics

 

Switzerland: Visitor exports and international tourist arrivals expected growth
Source: World Travel & Tourism Council – report on Switzerland

 

What makes Le Bijou exceptional

It’s our experience that makes us indispensable. We have years of practice in accumulating contacts with realtors and owners of the best apartments in Zurich, Zug, Lucerne, Geneva, and other big cities. Apartment owners are pleased to cooperate with us because they know about our brand and know that we care about their property – after all, it’s our money invested in the high-end renovation, so it is in our best interest to keep it in the best shape possible.

We also have established contacts with event agencies in major Swiss cities and travel agencies from Saudi Arabia, Dubai, China, and Qatar, providing a more stable demand for our offerings.

Summarizing this section, the Le Bijou is a unique opportunity for all participants of this business. Owners have a brand to which they can trust their best apartments, agencies have a brand they can cooperate with in creating a proper atmosphere, and guests can just be delighted with the best hotel experience they have ever had.

 

Owners Club

All Le Bijou equity model investors automatically become members of the Owners Club. This is a unique feature that many of our customers appreciate. We created a club in which you can find like-minded people or even future business partners. The Owners Club meets at least a few times a year and is attended by existing investors – investment professionals, business owners, and celebrities, as well as select invited guests.

Investors also become brand ambassadors, and together with our guests create a new community of like-minded people that will accelerate the earnings above and beyond other hotel brands.

 

Last words

Potential investors may want to know about the level of satisfaction experienced by our guests. To that end, we provide testimonials from our consumers which have been published in the press and can be found here.

As an example of the positive feedback we’ve received from our valued customers, we’ve included the following comments below:

“Whether it’s a celebration with one or 100 guests, a business trip or a VIP stay, Le Bijou is an ideal location.” – National Geographic Traveler

“What Le Bijou has accomplished is to put all of the things that otherwise would be very complex for a traveler into a straightforward and elegant experience.” – John Sculley, ex-CEO of Apple and ex-CEO of Pepsi.

 

John Sculley, ex-CEO of Apple and Pepsi, about his stay at Le Bijou:

 

Additional reviews regarding our services can be found in the outlets where we promote our services, including Hotels.com, Airbnb and Trip Advisor.

It’s our hope that the idea of creating exclusive, private hotels inspires you as it has inspired us. We are confident that our investment vehicle is the right product at the right time, providing profit and security in an evolving market.

 

 

27. December 2018

Airbnb turns the tourism industry around

Airbnb celebrated its tenth anniversary in early August. When Airbnb started ten years ago, many found the idea of staying in private lodgings of strangers crazy and predicted that this idea would never work. Today – ten years later – more than 5 million Airbnb hosts offer their accommodation for rent. Hosts around the world have welcomed more than 300 million guests in more than 81,000 cities and from 191 countries.

Read more

19. December 2018

Crowdhouse: Critical Review, Risks, and 5 Alternatives

Overview of the hottest crowdfunding platforms in Switzerland

A professional analysis of top crowdfunding platforms in real estate by Alexander Hübner, real estate investor and property manager, one of Switzerland top 5 entrepreneurs in the service sector (according to Swiss Economic Forum), CEO of Le Bijou, real estate investment management firm.

Assuming that you earned a certain amount of capital (let’s say up to 500K CHF) you must have started exploring possibilities that would help multiply it. Considering some available possibilities of multiplying it through investments you must have realized that:

  • Banks offer a very small percentage of revenue from savings accounts which means you would not benefit much, therefore there is no point of investing there;
  • Investment banks such as Credit Suisse are not interested in managing small capitals;
  • Stock investment requires extensive knowledge in the field; over 95% of funds can’t outperform the market in the long run (surprise!);
  • And the crypto industry is a subject to great risk because its volatile in nature.

So where to invest?

Such a lack of investment options for small-sized investors contributed to the growth of alternative investments market.

The main idea behind alternative investment solutions is “let’s put small amounts of investors’ money together and invest this larger capital in better investment opportunities, unavailable to these investors individually”.

One of the most popular alternative investment models in Switzerland is crowdfunding in real estate. The logic behind this form of investment is that the management company buys a property and then sells shares to its shareholders. To put it simply, small-sized investors put their money together to become owners of a large and lucrative building that none of them can afford to buy individually. In this investment method, you can become an investor with less than 100K. It is interesting that some crowdfunding platforms accept investors who have as little as 1000 CHF, which appeals to a lot of people and the gold rush begins.

One of the most prominent crowd-financing platforms for real estate is Crowdhouse.ch which was named as “The leading Swiss provider in real estate crowd investment” in Cash.ch.

If you already considered investing through Crowdhouse.ch, then most likely you already noticed that there aren’t many reviews, personal experiences and risk overviews available online anywhere else apart from the platform’s website.

Crowdhouse triggered my professional interest, as I’ve been investing in Swiss properties since 2013 on my own as well as with partners. So I decided to dig deeper to see how these crowd-financing companies actually work and produced a quick review that can help others to make better-informed decisions.

Before you get into the analysis of individual proposals in the real estate investment market, I would highly suggest that you learn the business model of each of the companies, so that you can understand their own incentives and the possible risks.

Let’s explore how the crowd-financing model works when applied to real estate by using the example of Crowdhouse platform mentioned above.

So, how does crowd–financing work in real estate?

The properties selected by agencies are self-supporting which means that rental income exceeds mortgage interest and other expenses by a great margin.

Let’s take a more detailed look into the concept of crowdhouse discovering step-by-step procedures of typical Swiss real-estate company.

 

Property selection

Type of buildings: Crowd-financing services look for quality real property that is either completely refurbished or new apartment buildings in locations where they expect increasing demand.

Before offering an investment, they carefully check the location and the building. The main factors in the selection of real estate are demand and overheating of the value of real estate in this location.

Market value estimation: Valuation partner draws up a market value estimate for each property and an additional external report is also compiled by construction experts. The lending bank inspects each property, as they are putting their own money towards it as a way of boosting their security.

If a property passes the inspections and the crowd-financing platform is in agreement with the seller regarding conditions, they secure it for you contractually and give a down payment.

 

Property purchase in co-ownership

  • About half of the purchase price of the property is typically co-financed with a mortgage;
  • The value capital is partitioned among several buyers and offered in co-ownership;
  • When all co-owners have been determined, their value capital is transferred to the common property account. The loaning bank then transfers the purchase amount to the owner of the property. Service take care for the whole transaction process;
  • After the purchase services take care of the management and the property asset management to thereby manage the property profitably, conserve its value and ensure sustainably stable returns.

Recurring rental income

The effective rent yield is usually transferred to the co-owners monthly or per quarter and definitively determined at the end of the year. Income varies depending on the agency, property purchased and market conditions and averages 5-7% per annum (when leveraged through mortgage loan).

Crowdhouse risks

After understanding the crowd-financing processes, let’s proceed and get familiar with its risks.

To fully assess all the risks, I will divide them into 3 parts:

– Risks associated with the purchase of real estate;

– Risks associated with the rental fee;

– Fundamental risks.

Purchase of real estate

Most of the risks associated with this type of investment are similar to the risks of buying property alone.

When you invest in real estate, you have to be ready to losses connected with the following reasons:

  • Change in the attractiveness of the location;
  • Real estate market fluctuation – volatility – short-term changes in the property’s value;
  • The risk of the building (construction quality).

Rental fee-related risks

Your recurring revenues on existing buildings will essentially consist of rental income. They may decrease in the future based on several factors such as:

  • Non-payment of the rent by the tenants;
  • Vacancy rate; Source: Vacancy rates go up in Switzerland, and the rents keep falling; – UBS Real Estate Report
  • Reduction of the rent due to the change in supply and demand;
  • The reduction of the interest rate;
  • Invalidity of the lease agreement (or of specific clauses);
  • Rent reduction requests and other factors including force majeure and natural disasters;

Fundamental risks

  • Your property is immediately pledged and there is a risk of losing it;
  • You are also exposed to the risks associated with the bubble of the Swiss real estate market.

Risks specific to crowd financing services

  • Small shares of properties are illiquid:
    You are not buying a property, but a small piece of property that is much more difficult to sell. Big investment funds are not interested in buying 10%-20% shares of buildings, as the cost of the due diligence will be too high relative to the cost of the share (they would need to evaluate the whole building/location to buy just 10%-20% of the property, what doesn’t make sense financially).
    So most likely you will be urged to sell your shares through your crowd-financing platform, where there may be no buyers for it.
  • Any changes to the project have to be discussed with all owners;
  • Most properties financed by crowdfunding platforms are located in cities’ outskirts or in small towns, that means that the rental income is dependent on local companies’ office’s activity and/or immigration. The smaller the city, the more it is dependent on the few companies that operate there. The trends are that foreign workers leave the country and that companies outsource their local offices to cheaper places.

Let’s try to sum up what we have.


Unlike bonds (with a guaranteed income) and giving your capital to an investment bank, in crowdhouse you buy an actual property, that’s why you are exposed to risks associated with the construction of these buildings, their condition, the location in which they are located, the laws of location and the conditions for leasing this building.

Properties are usually leveraged by the bank by 50%-60% (what doubles all the risks)

Now you understand how it works and what are the risks, let’s get into a comparison of certain services. We will concentrate on their differences to discover how to choose the best options.
There are a few questions you have to answer before choosing one of them:

  • Promised returns;
  • Additional risks;
  • Service fees;
  • What is the minimum to invest in one project?
  • And how many properties they had raised funds for?

 

Crowdhouse.ch and it’s alternatives review

Crowdhouse

 

Estimated returns: 5–7% (actual returns will be around 4% – 5% before income tax, as a part of the revenue goes to security fund and will be locked in there; also, deduct the purchase fees).

Risks: as mentioned above.

They usually buy properties in small towns, where the demand for housing is dependent on a relatively small number of local companies (when compared to a bigger city); or, they buy properties in low-cost locations of bigger cities, where the demand is largely dependent on low-cost tenants, who are usually immigrants and can leave the country. If you lose tenants, the rental price goes down. If it goes down you have nothing to pay for mortgage interest and then you may have to sell a house to cover the bank services.

Fees: 3% of the purchase price of the respective property +  5–7.5% of the property’s success for the property and co-owner management.

Minimum contribution: 100 000 CHF.

Until now, they raised funds for 59 properties, which is the biggest amount in the Swiss market.

 

Crowdhouse Alternatives

Foxstone

Estimated returns: 5,5–7%

Risks: as mentioned above + this particular company appeared on market just a year ago, so there is no information about how many properties they raised funds for.

Fees: 3% of the gross asset value once the transaction is closed and management fees of 0.25% to 0.5% of the asset price (this price is already deducted from returns), digressive according to the amount of the deal.


Minimum contribution: 50 000 CHF.

 

The Housecrowd

Estimated returns: 5–6%

Risks: as mentioned above + this service allows venturing into being an investor starting from 1000 GBP, which is quite a small sum that allows separating ownership between lots of investors.
Nevertheless, this firm has more than 350 properties they raised funds for, which is a large amount and is respectable.

Fees: information on the site tells us that fees are around 5% and can change a bit in different projects.

 

Crowdli

Estimated returns: 5.5-6%

Risks: as mentioned above + all property presented locates in villages with less than 10K population. In this case, you expose yourself to the undue risk of loss of liquidity of your property. And as a common flaw of this type of investment you own this property, and if it loses liquidity – you will have to lower rental rate or even sell it to cover the mortgage.

Fees: 3,6%(without VAT)  of the gross asset value once the transaction is closed and you pay from 4% to 5% of years income for administration service (+ you cover the cost of promotion of your property).

You can become an investor by investing 10 000 CHF.

 

Crowdpark

Estimated returns: 5-7%

Risks: as mentioned above + this company has only 1 open proposition for co-ownership and doesn’t show finished crowdfunding processes. This moment pushes us to realize that they might not be as experienced as we would like them to see. Also, the site of a company lacks any information about their fees and historical returns.

The minimum amount of investment for this option starts from 25 000 CHF.

 

MyBrick

Estimated returns: 4.5-7.5%

Risks: as mentioned above + this company takes the biggest amount of loans from the banks (70+%) to cover the price of the property. Which means that in case of lowering the rental cost and losing tenants, owners will have to pay back the whole sum to a bank for its interest rate. The information on historical returns is not available at the time of writing of this material.

Fees: charges any investor 2-3% (Before VAT) of the amount invested to cover the expenses related to the preparation of the acquisition.

You can become an investor starting with 20 000 CHF investment.

 

Let’s step aside to have a look at what this market has to propose for us

 

Real estate market is overheated in major locations.

UBS Wealth research suggests that the Swiss real estate market is overheated in several major locations.

You can make a simple analogy with the stock market of the late 90s: you would hardly recommend someone to invest in IT companies that were at their peak in those years.

“Heat level” in different geographical regions of Swiss real estate market – source (UBS Wealth)

 

Liquidity problem: How do you exit if there’s a need?

Along with the market conditions and promises of services that will help you to get in, there should always be a matter of promptly exiting the market.

In case you need to return your investments promptly, or when the market starts to collapse, you will face the following problem: since the trade is conducted only on platforms similar to discussed above, you will have to sell your property mostly there. The amount of buyers on such platforms is quite limited, so most probably you won’t be able to sell your piece of the pie really quick.

Investment funds won’t be interested in buying 5%-10% share in a building, as the cost of due diligence will be too high relative to the amount of the investment – they can spend on due diligence half of the worth of your share. So financially it doesn’t make any sense to investment funds, as well as to any other institutional investors.

 

Risk/Profit ratio

Risks and profits are one of the most important factors that should be considered before making an investment of any type.

In the best case, we will receive about 6% per annum; the income is not guaranteed, and we have our money locked in real estate for 5-10 years without the real opportunity to pull them out. The model is capital intense and also you take a mortgage, that doubles your risks.

Personally, I came to the conclusion that investment in Crowdhouse and similar services don’t provide a fair reward for the risk. During my career, I have been setting up deals that would yield 7% fixed returns (bonds), and also other deals without even buying the real estate but rather leasing it, that would give me up to 21%, and 13% – 18% in average.

Taking into account all the risks described above, I thoroughly advise you to rethink the topic of the purchase of real estate as an investment.