Real Estate

GUEST ARTICLE: Family Office, HNW Individual Co-Investment In Alternative Property

Suzanne Lupton, 19 January 2018

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With uncertainty likely to persist in traditional equity and fixed income markets, there is a real opportunity for investors to make a substantial financial return from alternative property, the author argues.

Here is an article from Suzanne Lupton, director of co-investment, Maven Capital Partners, examining the case for real estate and how family offices should think about this. As the author states, a continued driver for family offices and other investors is a demand for yield; finding yield involves some trade-offs and tolerance for illiquidity.

The editors of this news service are happy to share these views with readers. The views of guest writer aren’t necessarily shared by editors here. Email the editor at tom.burroughes@wealthbriefing.com

Faced with today’s low returns environment, family offices and high net worth individuals  are increasingly looking to alternative assets in their search for yield. As a result, these experienced investors are increasing their allocations to assets such as property, which allow them to diversify their portfolios and help insulate against sharp moves in public markets. 

Historically the preserve of institutional investors, co-investment across both private equity and property assets is rising in popularity amongst high net worth individuals and family offices, and these investors regular access to a diverse range of opportunities in high quality, thoroughly appraised transactions, enabling them to invest on a deal-by-deal basis with a greater degree of control to reflect their sectoral preferences and risk profiles. 

This firmer grip over capital commitments in specific sectors and asset classes can be more attractive than traditional investment in PE funds or hedge funds, due to the ability to create bespoke portfolios according to individual objectives and sector preferences – as well as achieving more favourable fee structures than if they were investing via a fund.

There’s a clear rise in the new generation of self-directed investors as increasingly millennials with accumulated wealth favour a tailored attitude to investment. We are currently seeing an increase in the number of HNW individuals and FOs using co-investment vehicles to invest in alternative property assets, namely hotels, student accommodation and more recently, care homes. This reflects the popularity of commercial property in the UK, where a strong market was expected to produce transaction volumes of up to £50 billion ($68.8 billion) in 2017, 15 per cent higher than 2016.

Unlike traditional commercial property, which typically carries unexpired commercial leases of about four years, alternative property assets often boast leases of around 25-30 years, making them attractive, long-term investment prospects. These assets are able to generate stable income for investors and, in case of care homes specifically, above inflation rental growth. In view of the uncertainty that seems likely to persist in traditional equity and fixed income markets, access to superior, private equity and property opportunities will be a major attraction for investors and increasingly become a core element of many FO and HNW individual portfolios. 

The student accommodation sector has matured rapidly in recent years and is currently experiencing record levels of institutional investment due to the higher returns achievable than on standard buy-to-let property. Student accommodation has also proved itself to be a resilient asset class, largely due to the fact that higher education tends not to be greatly affected by cyclical market changes, even during an economic downturn. Structural undersupply remains endemic in most key university markets, as student enrolment continues to heavily outweigh the supply of student housing each year, and in the medium term we expect this dynamic to remain as the driving force behind investment.

Investments in the hotel sector are attractive for similar reasons, typically producing stable returns and well-positioned to weather inflation. Invesco’s 2017 ‘Time to Check In’ report noted that assets in the hotel sector were cash-flow generative, with daily pricing of individual rooms providing protection against inflation. Recent forecasts by VisitBritain suggest that the number of overseas visitors to the UK reached 39.7 million in 2017, an increase of 6 per cent from 2016. With £25.7 billion in visitor spending estimated during 2017 (up 14 per cent on the previous year), hotels are among the biggest beneficiaries.

We have also been experiencing increasing investor interest in care home investment.  A recent report from Savills noted that the long indexed income with either RPI or fixed uplifts has made healthcare assets an "appealing proposition for investors struggling to find similar opportunities in the mainstream markets”. As with hotels and student accommodation, this sector boasts strong demand for good quality assets, fueled by the UK’s increasing elderly population and the imbalance between the number of modern care homes with capacity that opened and those that closed since 2011.
 
UK property has long been an attractive investment for FOs and HNWIs based overseas. A 2017 Savills report states that the UK remained the largest commercial property market in Europe over the previous year, with an overall market value of €59.1 billion ($72.1 billioin); the market here has long been regarded as a safe haven for international investors when compared with other economies – even following the Brexit referendum result – and is known for its maturity and transparency, its favourable property taxes and values and growing buy-to-let market.

While alternative property assets are illiquid in nature, this isn’t a cause for concern for many HNWI and FO investors, who have widely diversified portfolios and a tendency to focus on safe haven, trophy properties, that not only generate income, but also support capital growth and wealth preservation. They are a particularly good fit for HNW individuals and family offices, meeting their preference for investment opportunities which offer regular income and capital gains. With uncertainty likely to persist in traditional equity and fixed income markets, there is a real opportunity for investors to make a substantial financial return from alternative property.

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