Direct Investing

Family Office Investing

By Ben Maslan and Seven Douzdjian – RCLCO

Publisher Insight: Real Estate is becoming more of an important part of a family office portfolio allocation. In this article Ben and Seen does a good job of explaining why this trend is continuing to go on.

Family office are always interested in novel ways to achieving higher total returns with predictable cash flow. lately, they have been leaning towards greater portfolio allocations in alternative assets, particularly real estate.

This is a logical strategy, with cap rates hovering above 6%, a healthy premium over the current dividend yield of approximately 2% on the S&P 500. It’s also a popular strategy – according to a Preqin survey, almost 600 family offices are either currently or considering investing in real estate at allocation levels of $5 million to over $1 billion.

While real estate has historically been part of a family office portfolios, exposure to the asset class has accelerated over the last five years. Despite rich asset pricing, post-recession acquisition activity by family office has averaged $3.9 billion per year since 2012, nearly twice the pre-recession average of $2.1 billion per year. Likewise, the post-recession annual peak acquisition volume of $6.1 billion handily tops the pre-recession peak of $4.0 billion.

The long-term nature of real estate dovetails nicely with the investing objectives of institutional investors, and family offices in particular, as they are not under pressure to generate immediate cash flow.

Family office though allocate a greater share of their portfolios to real estate than institutions; the average family office portfolio today has approximately 16% in real estate, second only to global equities. Compare that to the average Fortune 1000 defined benefit plan, which as of year-end 2016 allocated just 3.3% to real estate.

Family offices are also much more likely to invest directly in real estate. If they can achieve a certain level of competency, they can bypass fund managers’ fees, while enjoying more control and transparency, without losing out on net returns. Nearly two-thirds of family offices with assets above $100 million that invest in real estate and are tracked by Preqin invest directly in some form. but private and public sector pension plans with real estate holding place just 30% in direct investment, preferring to stick to closed-end commingled funds.

As family offices have learned to source real estate transactions directly and create their own real estate operating companies, they have realized they can translate their expertise into raising outside equity capital. With capital from limited partners come grater portfolio breadth and diversification, attractive fee revenue from asset management fees and carried interest..If they can live with less control and more reporting requirements. In our capacity as a pension plan advisor focused on real estate, RCLCO has seen an increase in the number of pitches from family offices attempting to raise capital from institutional investors.

With the spread of real estate cap rates to equity yields at historic highs, and fixed income spreads remaining wide despite recent Treasury yield hikes, we expect family offices to continue to look for new ways to gain exposure to the sector, and become an increasingly important capital source for the real estate industry.

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