Family offices and their real estate strategies
All Family Offices are established with the sole purpose of investing and managing funds on behalf of a family with significant wealth. As most families want to ensure a sound legacy for the next generation, Family Offices tend to be mindful of wealth preservation. Real estate, therefore, offers an interesting long-term investment opportunity for Family Offices and they are increasingly adjusting their allocation towards this alternative asset class.
Last year, private investors accounted for c. 15-20% of all property transactions in the UK, which amounted to c. GBP 9.5 bn - GBP 14 bn of capital being invested into commercial real estate. This year, the numbers are down both in terms of total capital outlay and take up of market share. Family Offices remain active though and much of the recent reduction in transactions has stemmed from the slowdown associated with the recent European Union referendum, rather than any internal policy shift away from real estate as an asset class.
So where has the money been coming from? The traditional investors from the Middle East and Europe have remained firmly committed to the UK and in particular to central London. A significant number of the most notable landmark buildings are now owned by Family Offices. More recently, new private investors from India, Singapore, China, and particularly Hong Kong have shown an interest, all seeking an investment safe haven in the UK.
Market activity and joint ventures
In nearly all cases, the initial real estate strategy of a Family Office focuses on long-term wealth preservation, which is why offices in the City and the West End, luxury retail, and some of the most luxurious hotels in the capital have almost exclusively been the preserve of the ultra-high net worth investor over the past five years.
You might have expected the recent EU referendum to have deterred investors looking to London for opportunities, and while many investors have delayed investment decisions, some remained undeterred. Two transactions on Bond Street were announced just before the referendum, breaking the all-time record for a price paid on the street. The latest transaction resulted in a net initial yield of just over 1.5% and a price per sq ft of c. GBP 18,500, confirming ongoing significant demand for luxury assets and well-positioned investments in central London.
Whilst the UK institutions have been net sellers, those Single Family Offices with a long-term view and deep capital pools are still very active here. Although it is too early to tell what impact the Brexit vote will have on the London real estate market, the capital is likely to remain a global city, even if in the short term fears of a recession and of jobs moving offshore are realised. Those Family Offices adopting a longer-term view will be well-positioned to weather such upsets.
Where are family offices investing?
In addition to wealth preservation, Family Offices are looking for a reasonable rate of return. One way of potentially enhancing returns can be to introduce elements of debt. However, for those seeking even higher returns, development (of residential properties in particular) has been very much on the family office radar. While a handful of families have employed their own teams of developers, the preference has been to enter into joint ventures with well-established local developers. They can offer access to market information, sites, experience, knowledge, and ability to interpret planning policies effectively, all of which usually makes having such local expertise worth it, even if it comes at the expense of some of the future upside. In forming these joint ventures, most families want to see their partners making a genuine co-investment in the scheme to ensure interests are aligned.
Outside of development, where else are Family Offices investing? In a search for enhanced unleveraged returns, investors have shown increased demand for less traditional asset types and for assets outside of London. Alternatives to offices and prime retail include warehousing, hotel and leisure (albeit outside the luxury central London market), and various forms of residential style assets. Indeed, with respect to the latter, Family Offices and their investment teams have a marginal head start on the rest of the real estate investment community. Instead of seeing residential, the private rental sector (PRS), student accommodation, and even care homes or senior living as different asset classes, Family Offices simply consider them as varying parts of the residential.
What happens next?
It is clear that the UK real estate market remains a priority for many global Family Offices seeking a safe haven for their capital. Many Family Offices have already invested in assets on prime shopping streets, buoyed by the rise of the luxury brands on a global scale, or prime commercial office buildings in central London’s core markets. Those looking for higher returns are looking outside of London, in the regional UK cities, and indeed other parts of Europe. As European markets are less transparent, families will continue to build portfolios of quality assets in key cities across the UK – or at least in London before considering opportunities in Germany, France, and other European cities.
For those families who already own prime assets in London, or indeed within the regions and even across Europe, they benefit from being part of an investment club of sorts. Actuaries, fund maturities, and redemptions restrictions do not govern Family Offices; they are self-governed. Hence, when the next seismic shock to the market occurs, it is unlikely that this investment club will be forced to liquidate their assets and in fact, the families will be more than capable of riding out a market downturn.