_A family affair – insight into family office investment trends

In order to better understand the motivations and commercial property investment habits of family offices, we have created the first Knight Frank Family Office Investment Trends Survey.

The survey’s respondents – identified by the Knight Frank Private Client team – are family offices actively involved in commercial property investment, although the length of time they have been investing varies. All were interviewed directly.

The results, considered in conjunction with the findings from our long-running Attitudes Survey, combine to give us a unique understanding of how UHNWIs view and invest in commercial real estate.

Key Asset

Commercial real estate is an important asset class for private investors, with 25-30% of global transaction volumes attributed to private buyers. Our 2017 Attitudes Survey data echoes this and shows that a full quarter of private client wealth is held in real estate investments (excluding their primary residence and second homes).

Interestingly, this varies significantly from region to region, with Asian investors holding the highest proportion (29%) and North American investors the lowest (15%).

Investment drivers

When we asked respondents to our Investment Trends Survey why they invest in commercial real estate, the majority stated that diversification was the primary driver. Real estate is used in their portfolio to provide variation from both their domestic economy and across asset classes.

The stable income component was also a key attraction, and the term “future income stream” was often mentioned.

With capital preservation also important to the respondents it is unsurprising to note that there was a strong preference for “core” type investments, such as centrally located office and retail units on long leases. However, there was also appetite from some to identify “value add” or “opportunistic” investments as part of their strategy.

Controlling interest

Most respondents hold their real estate assets directly rather than handing over their capital to investment managers or real estate funds. There was a clear preference to “know what they own” and, importantly, to “have full control” of their investments.

A number expressed interest in investing in new market areas or sectors, but felt that a lack of expertise was holding them back.

One potential solution would be to work with a specialist asset manager to provide a correctly structured segregated fund, giving both control and local market capability.

Indeed, one investor was using a fund vehicle to gain exposure to a new market with the intention of switching to direct investment once they had gained a level of knowledge that allowed them to feel comfortable picking appropriate assets and property managers.

A few of our respondents were open to club deals with “friends and family”, but usually on condition that they retained the controlling stake.

In-house expertise

A number of the more established family offices discussed their decision to open a dedicated office to manage their real estate investments, enabling them to bring their asset management and due diligence processes in house.

Typically, such offices began on a limited scale with just a few staff, but grew as assets under management increased. Importantly, it was felt that this “on the ground” resource gave them an advantage in terms of sourcing opportunities and building a portfolio.

Sector selection

Our survey also identified office property as the most popular sector in investors’ portfolios, a finding borne out by both long-term global transactions data and the results of our Attitudes Survey. 

It was apparent that some investors were nervous about the structural changes under way in the retail sector, although those with experience of this particular asset class (from their primary business, for example) were very happy to have exposure. Others were looking at it selectively.

The survey findings also showed, as we have observed through our own advisory work, that logistics real estate is becoming increasingly attractive to our family office clients.

Risks and returns

We asked respondents to give us their view of the current risk/return opportunity in their market area in 2017. The average score was six out of 10 (where 10 was best). Most family offices see further value in the market, albeit with some concerns about the general economic climate.

In particular, a number were “worried about pricing of ‘core’ real estate in certain markets” and felt, correspondingly, that “stock selection was key”. When asked to clarify what, in their view, may negatively impact pricing in 2017, a number identified “interest rate pressures”, “occupational demand” and “low forecast rental growth” as their primary concerns.

Other respondents were more upbeat and suggested that, given the continued economic and political uncertainty, concerns from investors could be a cue to buy. They felt strongly that real estate continued to provide a safe haven for their capital and a stable and secure income return in a low growth environment.

Appetite for investment

Despite an element of caution expressed from some parts, the clear message was that respondents had a healthy appetite for further commercial real estate investment in 2017. Most talked in terms of large double-digit percentage target increases in the level of assets under management.

It was clear that the majority still felt “underinvested in property” and were on a journey to “rebalance overall portfolios”.

Typically, respondents were looking to secure lot sizes from £20 million to £50 million, although a number talked of scaling up to over £100 million, driven both by a desire to get money invested more rapidly and a perception that the reduced level of competition from other investors at this larger lot size might lead to better yields.

However, it was clear that any investments would be closely scrutinised, with there being no urgency to spend money unless the right opportunity arose. 

Location, location

Respondents’ preferred locations varied considerably depending on their domicile, with Australia, Africa and the US all cited as investment targets for 2017. The majority, however, continue to look to Europe for their allocations, with the UK and Germany the most popular individual countries. The reasons for this included the scale of the market, relative liquidity and the depth of opportunities available. 

Once again, these results reflect the outcome of our Attitudes Survey, where the majority of respondents favoured investment in Europe. 

Long-term view

The results of this first Investment Trends survey clearly show that family offices’ relationship with commercial property will only strengthen further over 2017. The asset class remains an important diversifier from their domestic economy and a “real” asset capable of providing both a store of wealth and a stable income component. 

Private investor allocations are expected to increase with significant dry powder targeting the sector. Offices remain the most popular sector although logistics is increasingly rising up the wish list as the strong fundamentals become clearer. 

As already stated, markets as diverse as Australia, the US, Africa and Asia were identified as potential hotspots.

However Europe is, by some margin, the preferred destination of global allocations for 2017, with the UK remaining top of the country list, despite the ongoing uncertainty of Brexit.