In this next post in the blog series – The Future of Money, we open a new section which gives practical strategies for building wealth. The first raft of posts lay the groundwork of knowledge around how finances and the world of money will change, and is changing now. One pillar of wealth is the asset class property, so today, we will specifically look at how to build a CBDC resilient property portfolio.
I would recommend, first reading my post What is a CBDC and why it matters to everyday investors. In that post I give you the background into what the Central Bank Digital Currency is.
To build a Central Bank Digital Currency (CBDC) resilient property portfolio will involve applying general principles of resilient investing, which are timeless. There will be a particular focus on assets that help defend against inflation and offer diversification benefits.
Key strategies for building a CBDC-resilient property portfolio include:
- Focus on Income-Generating Real Assets
- Prioritise Diversification
- Manage Debt and Capital Structure
- Maintain Liquidity and Flexibility
- Work with a Financial Advisor
1. Focus on Income-Generating Real Assets
CBDCs are a form of digital currency issued by a central bank. They are a primary concern for investors because of how they might interact with inflation or other macroeconomic shifts. Real tangible assets, such as real estate and infrastructure, can provide a hedge against inflation because their cash flows (e.g., rental income) can typically be adjusted upwards in line with rising costs. I.e. as costs go up, you raise the rents.
Diversify Property Types
Instead of relying on a single type of property (e.g. residential buy-to-let) you could consider diversifying across various property types. Here are some examples of different types of property investment:
- student accommodation
- serviced apartments
- commercial real estate.
- HMO’s (Houses of Multiple Occupation)
This will give you a hedge against one single type of property class, becoming unprofitable.
Target High-Yielding Locations
Invest in areas with strong tenant demand, high occupancy rates and stable property values. This could include areas such as commercial hubs and regeneration zones. Other areas could include near universities or large hospitals as there will always be a high demand. All this should help ensure consistent income.
Active Management for Pricing Power
As I go to view properties for my own portfolio, I am often shocked when I see tenanted rental properties, which are in a poor state of repair and the previous landlord has not increased the rent in years (sometimes decades). Actively manage your properties to ensure rents can be raised when market conditions allow, passing through inflationary pressures to tenants and protecting your purchasing power. I would rather raise the rent a little and often, so it keeps pace with inflation. For example, I would review the rent at the end of a tenancy period and raise it by the rate of inflation. I always compare the rent with others in the area.
I always try to keep my properties in excellent condition and I employ a letting agent to manage the property; Any repairs or issues are addressed in good time.
2. Prioritise Diversification
A cornerstone of a resilient portfolio is diversification across different asset classes, industries and geographic regions.
Geographic Spread
Avoid concentrating all your property investments in one location. You can diversify your property portfolio geographically, although I would caution that you really need to research a new area, first. Alternatively, you can joint venture with someone who really knows a particular area.
To really help protect against regional economic risks you could also consider international diversification. I will talk more about this later in the series when we come to Global Resilience. For now, though, you could start researching which foreign countries you could invest in for property.
Mix with Non-Property Assets
Although this post is primarily about real estate investing, you should think of diversification across all asset classes. Integrate your portfolio with other alternative assets beyond real estate as an overall wealth plan. Other assets include commodities, like gold for geopolitical risk, high-quality dividend-paying equities and core infrastructure. This should be mixed with a cash asset pot, so that you have enough to carry you through any lean times. Depending on what stage of life and appetite for risk you are at, you should have a tailored asset allocation proportion. For example, a balanced portfolio could be: 40% property; 35% equities; 15% cash; 10% other. Speak to an IFA so that they can advise on what mix yours should be.
3. Manage Debt and Capital Structure
While strategic leverage is a key part of property investing, managing debt levels effectively is important for long-term resilience. A portfolio with significantly reduced debt offers greater stability and less vulnerability to potential changes in interest rates or credit availability that might accompany a new monetary system.
For example, you could decide to keep your loan to value (LTV) between 50-60%. This could be split between properties with individual LTVs of 45% for older established investments to 75% for newer. I keep track of my overall debt, by tracking the overall LTV of my portfolio, individual LTVs and my debt vs equity ratio, which I want to keep below 0.5.
4. Maintain Liquidity and Flexibility
Following on from asset allocation, in the CBDC era we should also make sure to keep flexible. As we said above, we want to keep a proportion of our wealth in cash. A resilient portfolio does require a balance of illiquid assets (like property) with sufficient liquidity to weather unexpected shocks. Cash is however not the only liquid asset; equities could be classed as liquid:
Balance Illiquidity with Cash/Equities
The reason we want sufficient cash on hand or other liquid investments is to cover expenses and seize opportunities without being forced to sell property at unfavourable times. Anything that can be sold and liquidated into cash quickly should be considered.
Be Prepared to Adapt
Markets and economies evolve constantly. Be prepared to adapt your investment strategy and rebalance your portfolio regularly to maintain your desired risk profile. In times of high inflation, we may want to reduce our exposure to cash, whilst making sure that our expenses are covered for a good period e.g. 6-12 months.
5. Work with a Financial Advisor
Navigating potential shifts in the broader financial system, such as those related to CBDCs, involves complex considerations. A professional financial advisor can help you develop a clear investment plan aligned with your specific goals and risk tolerance. They can also help integrate physical climate risks and other emerging factors into your long-term strategy.
By applying these principles, you can build a property portfolio that is better positioned to withstand a range of macroeconomic and financial market shifts, including those related to the potential introduction of central bank digital currencies.
Summary
Building a CBDC-resilient property portfolio isn’t about fearing the future, it’s about being ready for it. The world of money is shifting fast, but the fundamentals that protect wealth haven’t changed. Those fundamentals are:
- own real assets
- stay diversified
- use debt wisely
- keep liquidity tight
- lean on expert guidance when you need it
If you apply these principles consistently, you’ll not only shield your portfolio from the uncertainty of a new monetary era, but you’ll also position yourself to spot opportunities long before the crowd.
In the next posts in this series, we’ll keep expanding your toolkit so you can stay ahead, stay flexible and build a property strategy that thrives no matter how the financial landscape evolves. Sign up to the newsletter so you don’t miss out.