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December 6, 2018

Family offices have upped their exposure to real estate, drawn by the attractive returns and diversification benefits the sector offers.

Real estate direct investments now account for an average 17 percent of all family office investments, an increase of 2.3 percentage points on the previous year, according to the Campden Wealth and UBS 2018 Global Family Office Report. A third of family offices plan to increase their real estate direct investments over the next 12 months, with only 13 percent aiming to reduce them. The rest will maintain current investment levels, according to the report.

Overall, real estate is currently the third largest asset class component of family offices’ portfolios.

While Real Capital Analytics doesn’t break out figures for family offices specifically, its data shows private investors have significantly ramped up their real estate activity since the dog days of the financial crisis, with acquisitions growing from approximately US$38 billion in 2009 to almost US$238 billion in 2017. Private investor sales in 2017 totalled just over US$230 billion.

Real estate as a hedge
Real estate’s low correlation to public equity ensures the sector is well-suited to diversifying investors’ portfolios of stocks, bonds and other alternatives, notes the Campden Wealth/UBS report. Real estate also performed well in 2017, with global returns averaging 12 percent.

“Family offices have been turning away from certain asset classes, such as hedge funds, while equity markets appear expensive and the long tenor bond markets won’t look attractive if interest rates continue to rise,” says Nick Wilson, JLL’s Capital Markets Research Director.

“Real estate is a good inflation hedge. It also runs off demand drivers that are separate from the standard business cycle. And with family offices able to leverage real estate assets with cheap debt, it will offer strong cash-on-cash returns.”

Diverse holdings, but a preference for local and commercial
Diversification within their real estate investments is another theme highlighted by the Global Family Office Report, which noted that most respondents with real estate investments hold a proportion in both private and commercial properties at local, regional and international levels.

Nevertheless, family offices currently favour commercial over residential real estate, with commercial making up 59 percent of the average real estate portfolio. Family offices also have a preference for investing in local markets, reflecting their stronger grasp of backyard opportunities. Only a quarter of investments are directed towards regional markets, and a fifth to international opportunities.

A lack of in-house capabilities means family offices will tend to invest in those real estate sectors with less intensive asset management requirements too, notes Wilson. “For example, hotels with a master lease, anything with a single tenant on a long lease, or residential formats. That said, if the family office is large enough it can sometimes take on more asset management-intensive asset classes.”

An increase in family office exposure to alternative real estate assets, such as within education and healthcare, will be another trend to watch. In such cases, family offices will need to partner with operators, says Wilson. “Some investors may start to favour alternative asset classes, but only if they can achieve it through an opco/propco [operating company/property company] structure, where they can remove the operational aspect of the investment.”

A growing force
An expanding asset base, and rising allocations to alternative investments as a whole, suggest family offices and the wider private wealth sector will be increasingly important investors in global real estate markets for the foreseeable future.

According to the Global Family Office Report, almost half the family office executives surveyed reported an increase in assets under management over the year, while 77 percent noted the wealth of the families they serve is rising.

“It is hard to forecast their precise allocations, but assets under management in the family office sector are growing quickly,” says Wilson. “So even with stable allocations, their overall investment in real estate will remain strong.”

Click to read why SWFs have returned to real estate with oil price boom.

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Nicholas Wilson

Director, Corporate Finance & Debt Research Asia Pacific Capital Markets

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