In a report published earlier this year, professional services firm Deloitte set out some of the challenges facing family offices. These included the perennial issues associated with managing the transfer of wealth between one generation and the next and developing strategies that take account of different priorities within families. Other challenges are very much of the moment – or are at least of the era. Greater mobility between countries has implications for wealth management strategies as does the arrival of new technologies.
But the report also provided a snapshot of how family offices are adapting their strategies, and in this respect, at least two investment trends were identified – namely a greater willingness to consider co-investment and a renewed focus on finding suitable real estate deals.
The Co-Investment Opportunity
According to the Deloitte survey, family offices are increasingly seeking investment partners. These might be other family offices or private equity firms. The common factor is that partnerships can provide a means to invest directly, not just in real estate but also in related sectors, such as hotels and Small Medium Sized Enterprises (Ss) with growth potential.
The truth is, of course, that an interest in real estate opportunities is not something that can be described as new. Property and property development projects have always been attractive, not least because the underlying value of land and/or buildings provides an often very substantial cushion against the risk of the venture itself failing.
But finding the very best investments – those that offer superior returns without undue risk – is not always easy. For instance, the property market is not homogenous. The relationship between supply and demand will differ depending on geography, as will factors such as regulation, taxation and labour costs.
Even within one jurisdiction – and the UK provides an example here – the potential returns on a property deal are dependent on local factors, such as the initial cost of land set against attainable rents or sales values. Again, there can be considerable variation from region to region. The challenge facing investors – including family offices – is to identify the opportunities that exist in markets and geographies that may be unfamiliar.
Co-investment is seen by the Deloitte survey as one way that family offices are identifying and gaining exposure to property.
Here in Britain, the fundamentals of the property market are robust. On the residential side of the equation, demand continues to exceed supply. Government figures suggest that Britain needs to build about 300,000 new homes a year and current construction rates are much lower than that.
The consequence is that sales prices and rentals are holding up. For example, in January 2019, the Royal Institute of Chartered Surveyors pointed to a 0.4% rise in overall house prices. Break it down to a regional level and a picture emerges of prices falling in some areas (notably London) and an upwards trend in others. Overall though, there is a clear demand for new properties coming on stream.
The commercial property sector is more mixed. For instance, in 2018, demand for office space was robust but there is a concern around retail property following a spate of major store chain failures. Meanwhile, new opportunities are emerging in the property market. For instance, the rise of startup culture in the UK has, in turn, led to a boom in refurbishment projects that create co-working spaces out of old office and manufacturing buildings.
Overall, there are still lucrative opportunities within the UK, especially if investments are carefully chosen in terms of sector and geography.
In that respect, it’s perhaps not surprising that co-investment in the property sector is of particular interest. For family offices, co-investment with a well-chosen partner – one with proven sector expertise – provides the means not only to share risk with others but also to identify investments that represent a good fit while offering superior returns.
This opportunity ties in neatly with a key family office trend. A report published in 2018 by a wealth management company, Campden FB and global investment firm KKR, found that 67% of family offices were expecting demand for co-investment deals to rise over the next twelve months. Such partnerships are not necessarily motivated by cost and risk splitting, Family offices said they were looking for partners with a demonstrable ability to add value to investment projects by bringing specialist expertise to bear.
Co-Investment via The Route
There is a bigger trend here. In the wake of the financial crisis, direct investment by major funds and by family offices has been on the rise and new models have emerged to provide exposure to a range of opportunities.
For example, The Route – Finance’s Private Debt Platform was set up to enable High Net Worth individuals to pool investment capital for the purpose of secured lending to SME’s. Since its launch in 2008, the platform has proven particularly appealing to property entrepreneurs who need to raise money over relatively short terms – ten months is typical – to back ventures ranging from new builds through to property redevelopments.
Today, the platform offers a range of finance options, including bridging finance, development finance, and mezzanine finance. The return for The Route’s investors over the last five years has averaged 18%.
In addition to its community of HNW individuals, the Route’s Private Debt Platform platform is also attracting family offices and institutions. This is no accident. On the demand side, the platform is attracting a broad range of projects from entrepreneurs who are, typically, highly experienced in the field of property development. The application and due diligence process enables The Route to identify the best projects in terms of viability and potential for superior returns. As such the platform is giving investors site of a broad range of lucrative opportunities.
To find out more contact: Bill Allen on 020 3141 9040