This guest feature looks at the property sub-sectors popular among family offices as they step up their alternatives allocations.
Specialist property finance firm ASK Partners has executed around £2 billion ($2.59 billion) of real estate deals, with family offices making up the majority of its investors. The firm's CEO and co-founder Daniel Austin discusses here, citing some useful data, where real estate fits into family office investment decisions, given that more than half of them expect a global recession by the end of 2020. He also outlines what is behind certain property sub-sectors seeing the most activity.
The trend among family offices remains allocating more, rather than less, into alternatives, which currently make up around 40 per cent of their investments. Austin suggests that MFOs and FOs globally are "evolving their strategies" to increase their diversification in a downturn, with property and private equity leading the interest.
This article is part of a series examining trends in the family offices sector around the world. To see a recent overview of issues, click here.
Following market volatility at the end of last year and a challenging beginning to this year, family offices and HNWs are preparing for further dislocation in financial markets as global economic concerns mount. Given this backdrop, they are evolving their strategies, focusing on more secure income yielding assets and also diversifying their investment options, in particular looking at alternative investment areas, such as private equity, gold and also real estate, which is still considered a bedrock asset for wealth creation and preservation.
According to a recent survey of some 360 family offices by UBS, the Swiss bank, and Campden Wealth, a data provider, 55 per cent of family offices expected the global economy to sink into a recession before the end of 2020. Already many family offices have been re-positioning their investments, with alternative investments making up around 40 per cent of their holdings, a significantly higher share than traditionally found on public pension funds.
Allocations to alternatives are set to increase even further. For example, close to 40 per cent of respondents said they anticipated a rise in direct private equity investments in 2020 and a net 28 per cent expected to increase their exposure via private equity funds. The appeal of gold has also risen with a net 12 per cent expecting to increase their allocation to the precious metal next year. However, hedge funds, due largely to poor performance and high fees, have continued to struggle to win new adherents among family offices, with allocations to hedge funds having been reduced for the past five years.
Probably the asset class that looks likely to benefit most, after private equity, from this strategy overhaul by family offices is property. Certainly for the UK, property assets look relatively inexpensive to overseas investors, given the weakness of the pound, which is helping to drive interest. A net 16 per cent aim to raise direct property holdings in 2020. According to the Knight Frank’s Wealth Report, property investment is increasing globally, with North American family offices having the largest exposure to property (57 per cent) and multi-family offices (66 per cent), most interested in diversifying their assets into real estate.
From our experience of working with family offices, it’s clear that a number are hiring more property investment professionals to manage the size and increasing complexity of the real estate portfolios they have been building up. With regard to the various property sub-sectors that are popular among family offices, below we have listed where we see the most interest and investment activity.
Mixed-use developments and retail parks remain attractive
Mixed-use developments and retail parks may appear to have lost their lustre because of the retail meltdown but they are still the focus of significant interest from family offices. Mixed-use developments are attracting a greater variety of commercial tenants, such as hotels and both mixed-use developments and retail parks are targeting retail warehouses to capitalise on the e-commerce boom. Mixed-use developments also play to the sustainability and impact investment metrics many family offices follow. For example, we had significant HNW/family office interest in a proposed 1.5 acre mixed-use scheme (hotel, service apartments, offices, residential) that we recently financed in King’s Cross (London), and the fact that it will help to regenerate the area was part of its appeal. On such developments senior lenders can target high single digit returns, while mezzanine investors can expect double-digit returns.
Housing offers robust investment opportunities
Lack of housing is one of the UK’s most serious issues and a dearth of social and affordable housing is at the heart of the UK’s housing crisis. Public finances cannot meet the ever-growing demand so private capital has stepped in to help. Increasingly we are seeing more innovative approaches. For instance, ASK recently financed the purchase of a business park in Bracknell which is proposed to be transformed into a 500-unit residential led mixed-use scheme (of which a significant proportion will be affordable housing). In the social housing arena, housing associations are increasingly turning to private capital providers to lease the social and affordable housing they need.
Mass affluent investors are already committed to the sector, largely through a number of listed real estate investment trusts (REITS), and HNWs and family offices are also increasingly appreciating its investment qualities. The robust return, circa 6 per cent, and the fact that it can be classed as an impact investment are two factors that help explain its appeal.