For many, 2022 was a bigger shock to their portfolios than the COVID-19 pandemic. For the past 2022 year, the S&P 500 is down 19.44%, while the Swiss Market Index lost 16.67% as of December 30, 2022. Even bonds, a supposedly reliable hedge, performed miserably. Vanguard’s Total Bond ETF has fallen 13.11% over the same period. The next few years may not be any better.

“Sometimes the stock market is quite investment-oriented, and other times it's almost totally a casino, a gambling parlor.” — Warren Buffett

Fear the bear market

It all started in the first quarter of 2022, when central banks began to realize that the war in Ukraine had transformed “transitory inflation” from the pandemic into a problem that could not be ignored. Interest rates began to rise, and markets entered bear territory. The hardest hit were the tech stocks. Tesla is in free fall, while Apple has gone from a nearly USD 3 trillion company to a USD 2.07 trillion company.

Unfortunately, the war in Ukraine does not look like it’s ending soon, and central banks, including the Fed and SNB, are miles away from their 2% inflation targets.

The U.S. and Switzerland inflation rates, compared to the Fed’s and SNB’s inflation targets
Source: SNB, Reuters, tradingeconomics.com, and tradingeconomics.com

Many are also predicting that the US and the euro area are likely to enter recessions in 2023. Bloomberg supports the aforementioned prediction, putting the odds of a recession occurring in 2023 at 100%. J.P. Morgan is predicting a US recession, while a Bank of America survey found that 69% of respondents expect weaker growth next year. What should you do about it?

Finding refuge in real estate

Diversification is a proven strategy to reduce portfolio risk, but how do you diversify when many of the usual hedge assets are all racing downwards?

Real estate remains a trusted choice by many ultra-high-net-worth (UHNWI) individuals. Many UHNWIs have used real estate to build and maintain their wealth over time, including through difficult economic periods.

“90% of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined.” — Andrew Carnegie

Real estate is a tangible asset that increases in value over the long term. Downturns do occur but are typically quickly reversed or have a minor impact. For example, Swiss house prices fell by 1.03% in Q2 2022 from the year before, following YoY declines of 0.11% in Q4 2021. However, housing prices are still higher than a year ago.

Property prices and rental income also tend to be positively correlated with inflation, which is a clear advantage in this new economic era of uncertainty. Investing in certificates of deposits in the current environment is watching inflation eat your financial security. ETFs also need to provide a much higher nominal return than previously to generate the same real return.

Not all real estate is created equal, however. Location is paramount. High-end properties in sought-after locations with limited supply tend to outperform.

Opportunities amid uncertainty: Portfolios operated by Le Bijou franchisees

Investing in real estate on your own is not as easy as buying stocks on a share trading platform. Further, uncertain times require extra attention and, unless you have the analytical brain and time discipline of Warren Buffett, your investments will suffer. It is easier and more advantageous to leave real estate investment to an expert. Le Bijou offers two well-diversified portfolios, one focused on Zurich and the other on Lucerne.

Rather than trying to find, buy, and manage a property on their own, investors can leverage the expertise of Le Bijou. Its franchises are independently operated and managed by Le Bijou.

Investors also enjoy the diversification benefits of investing in a portfolio of properties in a distinct city. Such scale and diversification are nearly impossible to achieve on your own unless you have CHF 30 million to invest. Further, the portfolios only include fully operational properties, so investors bear no risk of failed development.

Franchising benefits your portfolio in several ways:

1) Recession resistance

Le Bijou’s franchise model also includes a strong service-based income stream. Le Bijou provides customizable services to tenants, such as access to 24/7 healthcare, curated meals, personal office services, and cleaning. Such service-based income streams tend to be resistant to the effects of economic slowdowns. The pandemic is a case in point; while Le Bijou saw a decline in turnover, it was able to generate some extra income by providing in-room testing, doctor visits, and other health services to its tenants.

2) Low market correlation

While every business is subject to the overall economic climate, real estate franchising tends to have a lower level of correlation to the public markets. Individual investors and investment fund managers who had invested in a basket of lodging franchise firms over the 1990-2008 period were able to achieve superior returns amidst low correlation with major stock market indexes, such as the S&P 500 (0.267), CRSP (0.350), and Russell 2000 (0.337).

This is because of the importance of local market conditions and conditions specific to the real estate and lodging market in general, and to the management of franchises. So when you use franchising to balance your portfolio, you can reduce the total portfolio risk and volatility. For example, if the bear stock market deepens because of new geopolitical events, your portfolio will not move all the way with it. This is particularly attractive for risk-averse investors.

Curious? Let’s dive deeper!

1. Zurich Portfolio

Zurich is a leading global destination for tourists, ex-pats, and locals. Its picturesque lake views are matched with world-class amenities and services. This helps it rank third on a list of the world’s most liveable cities by the Economist Intelligence Unit. It also benefits from being a global financial center, home to ETH Zurich (the 11th-best university in the world), and the leading city in Switzerland.

Given these attributes, Zurich draws a well-diversified visitor base of short-term hotel guests; long-term, high-income residents; and event clients, which provides an ideal income stream. It is thus unsurprising that Zurich has one of the highest RevPAR (“revenue per available room”) in the world. Le Bijou aims to take advantage of this with a target of 120 properties in the area.

Since its inception in 2018, the Zurich portfolio has delivered an average return of 11.57% per year and remained profitable in both years of the pandemic. Distributable income remained at around 5% per year, excluding appreciation.

What’s most interesting is that the Zurich portfolio has an expected equity multiple (MOIC) of 2.21x over the next 10 years for its A-Shares. Accordingly, an investment of CHF 100'000 in the portfolio could return CHF 221'000 in 10 years.

2. Lucerne portfolio

Lucerne is postcard Switzerland, with alpine views, cobblestone streets, the Kapellbrücke, and the cog railway to Mount Pilatus. Unsurprisingly, Zurich attracts around 10 million tourists every year. Apart from the scenery, UHNWIs are also drawn by the luxury watchmakers and chic coffee shops and bars in the Bruch Quarter. Lucerne is also only 40 minutes from Zurich.

By investing in Le Bijou’s Lucerne portfolio, you will benefit from UHNWIs wanting to stay in Switzerland’s tourist capital. Le Bijou’s Lucerne properties provide luxury short-term stays and long-term residences for its guests.

The portfolio includes or will include owned and leased properties (40 years). Long-term leases reduce exposure to interest rate risk from mortgages and to general maintenance costs (e.g., elevator, structure, housing technology, etc.), which is the responsibility of the landlord.

Since its inception in 2019, the Lucerne portfolio has generated strong cash flow and had an average return of 10.14% per year. It remained profitable in both years of the pandemic. Distributable income remained at around 7% per year, excluding appreciation. As can be seen in the chart below, the Lucerne portfolio has consistently outperformed the industry benchmark for Swiss real estate. Note, the chart shows cash-on-cash results and doesn't compare value appreciation.

Comparison of dividend yields of Lucerne portfolios and SXI Real Estate Funds Broad

Moreover, the portfolio is expected to have a 2.01x equity multiple (MOIC) over 10 years for its A-Shares, making a single CHF 100'000 investment in the portfolio worth CHF 201'000 in 10 years.

Conclusion

Uncertain times call for tried-and-true measures. A portfolio of high-quality real estate in world-class locations such as Zurich and Lucerne provides strong diversification and returns in the face of rising inflation and declining returns from stocks and bonds. Let Le Bijou show you how! Rather than venturing out on your own, leverage our expertise, scale, and unique business model to grow your wealth in such taut times.

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