Trophy assets, unique investment opportunities

All the real estate on the planet would be worth some 217 trillion dollars, or 2.7 times more than the world’s GDP, according to a study published by the British real estate network Savills in 2017. So what is it all about? “The value of all real estate in the world: residential, commercial, but also agricultural land and forests for the first time,” the study said. Housing accounts for the bulk ($162 trillion). These figures can be dizzying because they are simply difficult to imagine. It is therefore interesting to put them into perspective in an attempt to tame them. “By comparison, the value of all the gold that has been produced is in the order of $6 trillion, real estate is 36 times that,” Savills calculates. Moreover, this is the price at a given point in time. But the real estate market is not fixed and can fluctuate widely.

On the real estate market, there is a wide range of “products”, from the most modest to the most coveted, with the Trophy Assets being part of the latter category. “Trophy Asset” is a term used in the real estate industry to describe a property that is exceptionally rare and in high demand by investors. These assets are typically iconic buildings in prime locations with strong real estate underpinnings. So why are Trophy Assets considered the best investments? Are they the best real estate product to increase profitability while reducing risk?

Trophy Assets, a keystone of intrinsic value

The intrinsic value corresponds to the “real” value of an asset, it is often wrongly neglected. This value is measured and obtained by means of financial models that evaluate different factual criteria such as the construction price, location, etc. The result obtained corresponds to the price for reproducing the same property identically, from which a certain percentage of depreciation due to its age (assessed according to age and maintenance) is deducted.

At first glance, one might think that the value of a real estate asset is its market value. In a regular real estate transaction, the market assigns a suitable price range within which the sale price is to be found. Negotiations will always take place within this range.

On the other hand, in the case of a sale of Trophy Asset, the elements from which the market price results must be questioned. There is still an indicator but it must be put into perspective. Indeed, the market price can be strongly influenced by biased factors. For example, at the dawn of the 2008 crisis in the United States, many properties were sold at prices well above their “real” value. The market at that time suffered from many biases, such as the false belief that property prices would continue to rise for many years to come, which led to strong speculation. By the time the world realised that prices were actually overvalued and that a bubble had formed it was already too late. Thousands of houses were bought on credit at prices well above their real value. The market then fell sharply to levels more in line with the intrinsic value of the goods.

In the case of a Trophy Asset, the market price has a less important place than for “classic” properties in the valuation process that will determine its final price. Trophy Assets are rare and so are transactions, so a valuation must be made on a case-by-case basis. This valuation is entrusted to analysts who are experts in the sector in question, and they take into account a large amount of objective and symbolic data. These “enlightened” sales reinforce the proximity of the selling price and the intrinsic value of the property. This allows investors to eliminate a lot of cognitive bias, it also reduces the risk of depreciation or high rental vacancies.

In addition, Trophy Assets can be real estate such as vineyards. Indeed, a vineyard that produces quality champagne has an obvious intrinsic value because of its rarity and unique appearance. If a vineyard produces grapes that give an exceptional champagne it will see its market price rise in an area where they are usually low (rural area). Thus, it is always the intrinsic value that influences the market value and not the other way around. The Trophy Assets are a perfect illustration of this. Whereas the market value, on the other hand, can have no influence on the intrinsic value except to serve speculative interests.

Profitability and capitalisation

The two main objectives of investors are, in the short term, to obtain a return on investment and, in the long term, to build up capital. Real estate and in particular Trophy Assets offer the possibility of achieving these objectives by transforming liquid assets into assets, to “secure” investments and obtain cash flow.

In terms of return on investment, Trophy Assets are rare and in high demand. They are used as shopping centres (Les Galeries Lafayette), offices (Société Générale Head Office), Grand Hotels (Ritz place Vendôme) etc. Very few properties offer these possibilities, they are all non-substitutable. This is a very great strength because it guarantees that demand will remain stable and constant. In addition, the operating methods of these properties produce high added value. These investments are therefore those that offer the best rental yield and the best profitability.

As far as capitalisation is concerned, investing in a Trophy Asset is a “guarantee” that your capital will not be eroded or depreciated. These assets are unique and require mandatory ongoing maintenance, the standing and reputation of the tenants occupying them is at stake. The tenants are the first concerned and call upon specialised companies for the maintenance of the building, these charges are part of the traditional operation. With regard to maintenance, renovation or works, owner-managers have an interest in reinvesting massively in the asset, which leads to a high level of capitalisation. On the other hand, in traditional real estate, if the property is poorly maintained, the value can fall sharply. Moreover, if it is located in an unstressed area, demand is more volatile than in strategic locations.

Should the traditional market experience difficulties, Trophy Assets will always offer a different and essential service. They can even be a “safe haven” for some investors who are moving away from traditional rental investments. In this case, prices would evolve in a way contrary to those of the traditional market. This is a significant advantage of investing in Trophy Assets.

By maximising profits while minimising risk exposure, Trophy Assets are an investment that combines profitability and capitalisation.

Few limitations

In the real estate industry, views on Trophy Assets diverge.

The amount of the transactions often remains confidential. For example, the sale of the prestigious Société Générale bank’s headquarters in Paris exceeded 100 million euros without the exact amount being known. This allows the market to be less susceptible to influence and to remain free, but it can lead to mistrust of other players in the sector.

Moreover, it is a market reserved for a category of investors with a solid financing structure: with a lot of liquidity and equity. So there are still strong inequalities that create barriers to investment. It is not possible for the majority of people to invest in such assets. However, according to a Crédit Foncier survey, in France, 70% of people wishing to invest money choose real estate. The main motivation remains the ability to earn a return and the creation of alternative income. Unfortunately, the majority of these investors have to make do with “mid-range” properties due to their lack of financing, knowledge or network. The Trophy Assets market can therefore be described as concentrated and opaque, which leads to investment friction.

The lack of liquidity of these assets is also an important limitation. Owning a 50 million euro building is an asset, but it is a major capital investment, which leaves little room for manoeuvre. Indeed, a large part of a company’s funds is concentrated on a single asset, which runs counter to a diversification logic. It is also difficult for small and medium-sized real estate companies to access this category of investments, which is still the most sought-after category.

Finally, Trophy Assets are a solid alternative to the standard property market. They enjoy a privileged position and evolve in a market of their own. They are sought after for their profitability and the security they offer. They are also unique. Having them in your portfolio allows you to diversify your portfolio with an optimal risk/return ratio. Unfortunately, barriers remain in this market and highlight inequalities between investors.

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