Why Family Offices Invest in Real Estate
For the most part, the purpose of the family office is to effectively transfer established wealth across generations. So investing in real estate–developing a housing complex, shopping center or even a town–have been primary ways family offices have created long-lasting wealth and contributed to economic growth.
Here are the top seven reasons why family offices invest in real estate:
- Comparable income stream to fixed income at current rates
- Tax efficiencies
- Uncorrelated returns to securities
- Estate planning strategies
- Family legacy creation
- Preferred treatment by government entities
- Socially responsible potential
With year after year of a consistently low interest rate environment, it’s no surprise there has been little differentiation in the eyes of family Office investors between cash-flowing assets and high yield investments. They want income and returns while they moderate risk to their family legacy investment capital. Opportunities can be found in both primary and secondary markets with variations in liquidity. Investors have become increasingly desensitized to the illiquidity of their investments when they are getting yield, income and capital appreciation.
An emerging trend in this area for Family Offices is their willingness to band together to alleviate total risk by partnering on a single real estate development project. There is even a new term for this partnership commonly known as “Club Deals” which have been common in other private investments.
The emergence of direct co-investment opportunities in real estate for family offices is a new take on an old story. Wealthy families have consistently accessed real estate as a valuable investment class and Clubbing predates currency as an asset class.
Family offices tend to be more nimble than institutional investors because they can operate within their own scriptures of investment styles and change them as they see fit. Institutions have confines that bind them by styles, class, geography and registrations. For example, family offices might enjoy investing in office-space, retail, multifamily residential and apartments with no fixed allocation at any given time. Consistently looking for opportunistic deals, a family office might set its sights on real estate in economically depressed areas of Europe from the UK, to Spain and even Greece. Patience is the strategic mantra.
In the US, there are depressed areas across the country where there are undervalued assets and markets experiencing high growth. Both might provide a conflux of opportunity for the right investor who is thinking of how to continue the need for reallocation of living space and revitalization of a community for social welfare make a win-win from the investors’ perspective.
“That’s a major shift in thinking to go from purely liquid to illiquid allocations,” Dani Evanson, managing director with RMA says. The client “just said that in 2014 and beyond, [they] see a negative return in [their] bond portfolio and believe that real estate may serve as an alternative and get the yield that [they] need.”
Evanson goes on to explain how clients are looking for value-add, high return investments that are not correlated with stock market. The diversity of these investments range from ground-up development projects, turnaround opportunities in the office sector, retail, hotel and industrial assets and student housing.
And there are more reasons that bode well, even in the prospects of raising interest rates. Profitability and the attractiveness of an investment are often determined in part by the capitalization (Cap) rate. The cap rate is defined by dividing the income the property will generate by the total value of the property. This can be done for other fixed assets like bonds, debentures and other financial instruments. Naturally the numbers change if/when interest rates change. Real estate has historically performed well in a rising interest rate and economic growth environment. If rates rise due to economic growth, commercial real estate should benefit from higher demand due to job growth, consumer spending increases, and new household formations.
Since family offices tend to buy and hold, family legacy, preferential treatment and socially responsible potential all fit nicely into the positive aspects of real estate investing.