Family offices shorten real estate exposure – survey

Uncertainty in the wake of Covid-19 means US family offices have shortened their time horizons when investing in real estate, according to a survey by DJ Van Keuren, managing director of Evergreen Property Partners.

The finding has emerged in the 2020 edition of his Family Office Real Estate survey which compiles the views of US family offices whose overall wealth totals $9.4 trillion.

Interest in the US government tax-efficient opportunity zones has doubled because investors can defer, or avoid, capital gains tax by swapping assets into lower-income communities

According to the survey, families prepared to own real estate in excess of 15 years have fallen from 33.3% of total respondents to 24.7%.   Those expecting to invest for 10 to 15 years have dropped in number from 17.4% to 11.2%. 

In contrast, those taking a shorter 7 to 10 year view have jumped from 18.4% to 32.6%.  Shorter holding periods have risen, except for periods less than 3 years, which is down from 4.6% to 1.1%, possibly reflecting a view that it may take time to achieve opportunistic returns.

According to Van Keuren, chief real estate officer for several family offices, the fall reflects: “long-term concern of the next recession.”  

Return expectations have fallen back. But families are better prepared to take advantage of distress following Covid-19 than during the credit crisis. Distressed and opportunistic deals are favoured, plus deals involving debt, hotels and retail. Co-investment between families is on the way up.  

Analysts are wary of prospects for retail property, due to the growth of online traffic. Many shopping centres have shut. But the survey only shows a slip of interest in retail from 27.7% to 25% following a sharp fall in sector values.

Interest in offices, despite trends towards home working, rose from 27.7% to 31%. Hotels, big Covid-19 sufferers, have fallen marginally from 27.7% to 23.8%. 

Retail, hotel and office investments are more heavily weighted in family office portfolios than their current interest in the sectors would suggest.

In contrast, demand for industrial deals rose from 38.8% to 53.6% and self-storage moved from 11.1% to 21.4%, reflecting the steady rise in distribution.

Family offices continued to show massive interest in multi-family apartments, with 75% of respondents keen to look at deals, against 77.7% last year. 

Senior apartments, assisted living and medical centres maintained double-digit demand reflecting the US ageing population.

Despite the dip in expectations, the survey says total returns from real estate are targeted at 14.3% a year. Van Keuren believes the sector remains suited for patient capital.

As well as rental income, tax efficiency of real estate remains popular, with the vast majority of respondents viewing it as important.  

Only 3.8% viewed the tax issue as unimportant, although the survey adds that surprisingly few families take advantage of tax efficiencies through 1031 real estate exchanges.

Interest in the US government tax-efficient opportunity zones has doubled because investors can defer, or avoid, capital gains tax by swapping assets into lower-income communities.

According to the survey: “We expect we shall see a spike in opportunity zone investments in 2021 due to capital gains created from equity portfolio sales.”