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Family Offices: Property's Rise In Asset Allocation

Daniel Austin

1 November 2019

Specialist property finance firm  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. 

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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.

Student housing rising in popularity
Student housing is a much sought-after asset class. Underpinned by strong fundamentals, student accommodation has evolved from an alternative asset class into a mainstream investment, attractive to a wealth of global investors. For example, in September we financed the purchase of a proposed 586-bed student scheme in Birmingham which is ideally located close to two universities; our investors were attracted by the counter-cyclical nature of further education to help protect returns in light of concerns over the economy. The sector has grown exponentially in the past decade with universities hosting more students than ever.

According to Knight Frank’s 2018 Student Housing report, deals in the European student housing market reached over $1 billion last year. The UK student property sector has been the best performing asset class since 2011. Institutional and family office and HNW investors have been attracted by the high yield and low vacancy rates. Over £3 billion of investment transactions have been taking place annually in recent years.

Flexible offices appeal to family offices
Family offices are increasingly appreciating the appeal of flexible offices as an investment. The sector has witnessed exceptional growth over the past few years, underpinned by long-term trends of changing workplace behaviour and the rapid increase of SMEs, the typical tenants for such offices. According to Colliers International, the rate of growth among flexible operators was 135 per cent between 2014-2018 and there was an over 200 per cent increase in flexible office centres. Typically, flexible offices offer a higher yield than traditional commercial office space, though as some of their income is variable from ancillary services, such as meeting room bookings, there is a slightly higher degree of risk.

Co-living spaces provide strong returns
Rising prices in major cities around the globe have seen dorm-like communal living become a much more sought-after environment for adults to make their home. According to JLL funding for co-living spaces has increase over 210 per cent annually since 2015. Tenants are showing a willingness to pay a premium for the convenience of flexible lease terms, furnished units, housekeeping, fitness centres and co-working spaces, all in the one place and for the one price, which is boosting yields. Coupled with rising demand, it has helped boost returns to over 5 per cent annually – which is why it is increasingly being looked at favourably by family offices looking for a mix of secure income and enhanced diversification.

Daniel Austin is co-founder and chief executive officer of specialist property finance provider, ASK Partners.