By Sara Seddon Kilbinger, Senior Reporter, REFIRE
As many investors continue to wait it out, it could be an opportune time for family offices to swoop in
As many institutional investors sit on the sidelines and private equity and venture capital funding ebbs, family offices, which are not subject to the same investment pressures, are stepping up.
Subsequently, family offices might be one of the investor groups that can most benefit from the current downturn in the market. John Amram, founder and CEO of HPBA Off Market Solutions, believes that now could be an opportune time for wealthy family offices to invest in real estate given their predisposition towards direct ownership.
Particularly in the case of residential acquisitions, family offices have started to plug the gap left by housing corporations, according to Savills, accounting for 25% of recent acquisitions: ‘Because the residential property corporations have fallen away as buyers and many fund managers only act very selectively, smaller and medium-sized lots are currently attracting more interest, for example among private investors and family offices,’ said Marco Högl, head of Residential Capital Markets at Savills.
Family offices invest and manage assets with the aim of preserving the wealth of the respective families. According to estimates, there are around 5,300 single-family offices worldwide, of which around three-quarters are located in North America and Europe. In addition to single-family offices managing the capital of only one family, there are also numerous multi-family offices that professionally manage the assets of up to several hundred families.
Growing interest in alternative assets as family offices seek higher returns
The strong performance of alternative assets, including real estate, is driving a long-term switch to investing in alternatives for the family office sector, according to new global research published last month by Ocorian, the specialist global provider of services to high net worth individuals, family offices, financial institutions, asset managers, and corporates. It surveyed more than 130 family office investment managers responsible for around $62.42 billion of AUM and found that almost all agree that the sector is increasingly investing in alternatives and that the switch is a long-term trend.
‘As family offices look to diversify their portfolios and generate higher returns, there is a growing interest in alternative asset classes such as private equity, real estate, and hedge funds,’ said Amy Collins, head of Family Offices at Ocorian. ‘Whilst these asset classes offer the potential for higher returns, they also require a higher level of expertise and specialised knowledge.’
A third of the family office investment managers surveyed said that their funds will increase allocations to real estate by 50% while 33% will make the same increase in allocations to private debt. The alternative asset classes seeing the most benefit from the switch in allocations are likely to be real estate and private debt – the study found a third (34%) say their funds will increase allocations to real estate by 50% or more while 33% will make the same increase in allocations to private debt. The research from Ocorian, which works with more than 60 family offices around the world, found funds are the most popular vehicles for investing in alternative assets.
Family office investment managers said the strong performance of alternatives is the key reason for the switch, followed by the diversification benefits and increasing transparency in the asset class. Increased choice in the sector was the fourth most popular reason for investing, ahead of inflation protection and the ability to provide regular income.
Investment increasingly driven by value-add opportunities
This ties in with Amram’s belief that family office investment is increasingly driven by value-add opportunities. Writing on LinkedIn, he noted that the families behind Germany’s family office market are as varied as their financial targets and investment attitude, with many of them taking a long-term investment approach, with a higher investment quota than many institutional investors. This is backed up by a study by Engel & Völkers, which suggests that many family offices in Germany prefer to invest in value-add properties in their home market. Moreover, a survey by consultancy Ebner Stolzlast year revealed that 97% of German family offices remain bullish about real estate, not least because of the inbuilt protection against inflation that rising rents offer.
‘The combination of a very restrictive financing situation and the possibility to acquire real estate at favourable conditions now offers an extra opportunity for family offices with strong equity positions,’ Amram wrote. ‘With a correspondingly long holding period, there is the possibility to invest anti-cyclically and profit from a later recovery on the investment market. At the same time, for many family offices, a large proportion of the customary competition on the market has disappeared: among these are professional investors with high volumes of borrowed capital and conservative institutional actors, such as insurers and foundations, who are waiting for greater audit security with regard to pricing.’
The sceptism on the part of German lenders is clear. The quarterly sentiment index BF.Quartalsbarometer prepared by Bulwiengesa is currently at a record low of -18.21 points. By way of comparison, during the Corona shock in the second quarter of 2020, this figure was -15.24 points, according to Amram. According to analysts, we are now facing a credit crunch, in which loans are being extended extremely selectively and with risk departments being given a far greater voting weight than the front office or the new business unit.
In line with their objectives, family offices strive to both generate attractive returns and aim at a conservative value preservation, in order to create a solid legacy for future generations, which can include investing in alternative asset classes. Very little data exists regarding just how much capital family offices allocate to real estate, although some estimates have put it at between 10% and 20% of their overall allocation. Ultimately, good quality real estate assets are well suited to asset preservation and can also generate considerable capital growth over long holding periods, which is a key argument for family offices, particularly when it comes to cross-generational investment strategies.
According to BNP Paribas, the share of family offices in the officially reported transaction volume of all market players was 3.2% last year, which Amram said is not surprising given that family offices – unlike many other investors – are not typically driven by investment pressure or the interests of third parties as a rule, and accordingly can simply sit out a period of uncertainty.
Last year, this uncertainty was shaped by the historically high degree of interest rate dynamics, whereby pricing became much more difficult for buyers and sellers. Potential buyers faced the challenge that interest rates could in part fluctuate greatly between the due diligence and the signing, and that business plans would therefore sometimes have to be amended several times, according to Amram. By contrast, a large number of sellers persevered at the price levels from 2020 and 2021 – an unrealistic expectation in many cases given the shift in interest rates.
Family offices can ride out real estate cycles
In light of the fact that family offices tend to make long-term commitments and can ride out real estate cycles, lower prices today make real estate even more enticing. Markdowns of six to ten times the annual net rent have become the reality for residential properties in metropolitan regions, according to Amram, although there are still very few examples of transactions. After years of exaggerated market prices, real estate is now coming on to the market at very favourable prices, above all against the background of ever-increasing rents in many locations for both residential and commercial real estate.
Furthermore, he notes, the announcements by the US central bank, the Fed, and the ECB in December 2022, namely that they would increase interest rates further but lower the rate hikes from 75 to 50 basis points and where necessary skip individual rate moves, have led to interest rate dynamics abating. This has resulted in a general tendency towards greater planning certainty. However, Amram notes that the challenges remain considerable, as underlined by the hikes by the Fed (0.25%) and the ECB (0.5%) at the beginning of February.
Heavily regulated investors have also been hit by the fact that the arithmetical real estate quota in 2022 is now considerably greater as the devaluation for stocks, shares and bonds has been much larger than that for direct real estate investments and real estate funds. This can also lead to restrictions being placed on the available options.
The complexity of current market developments makes it difficult to offer any prognosis regarding the timeframe and dynamism of the re-opening on the markets, according to Amram: ‘Accordingly, it is not possible to forecast with any certainty whether family offices will actually dominate market activity in the first six months of 2023. Nevertheless, numerous factors point to this being the case and the other market players should prepare for this in good time.’
