Real Estate: an asset class of choice for Family Offices
Real estate investments represent a large part in family offices asset allocation with 15% in direct investments and 1% in REITS according to the Global Family Office Report 2016.
It even increases to 19% in Europe with cities such as London, Paris and Berlin being top picks among the world's wealthiest investors. Expectations for rising interest rates in the US following Donald Trump's election haven't dampened the appetite of the world's super-rich to scoop-up property investments.
According to property broker Knight Frank the number of ultra-wealthy living in London is expected to rise by 30 percent in the next decade as the UK is seen as the dominant centre for business in Europe and the only major English speaking economy in the region looking to lure Asian and Middle Eastern investors.
The largest family offices behave more and more like pension funds or insurance companies and compete on some assets with those investors. A recent example is the contemplated sale of the Leadenhall Building in London, known as the Cheesegrater for its triangular shape, where a consortium of Chinese private investors is bidding against some of the world's largest pension funds and insurance companies. This transaction could be the largest in London since Qatar’s sovereign wealth fund bought HSBC’s headquarters in Canary Wharf.
In a low or even negative interest rates environment like in Europe or Switzerland, wealthy families look at ways to generate yield by either accepting a longer investment horizon or less liquid investments and even sometimes both when it comes to private equity investments. Their objectives are very much similar to those of pension funds, that is preserve capital for their “pensioneers” called in this case next generation.
With cost of capital at historical lows, Family Offices lock-in extremely cheap borrowing conditions and enhance their returns significantly. A number of them managed to reach double digit cash-on-cash returns in 2016 with the most successful Family Offices investors even reaching returns in excess of 20%.
As a comparison, the direct real estate strategy of the Harvard Management Company, which manages the university’s $36bn endowment, returned 20.2% in 2016.
However is this trend sustainable going forward? Several headwinds are to be feared such as rising interest rates, lower yield in prime cities, more stringent regulation in some countries or tax burden in others.
But with almost a third of ultra-wealthy people planning to invest in real estate outside their main country of residence according to Knight Frank, the strength of the USD vs. other major currencies such as EUR or GBP, one can expect real estate investments to remain an asset class of choice for Family Offices in the foreseeable future.