Family offices, real estate…and trying to fathom the future of property

This is far from a vintage year for real estate, still striving to come to terms with Covid-19 and tech-driven disruption.

Third-quarter global deals fell to $128 billion, a level not seen since early 2012, when the last financial crisis ended, according to Real Capital Analytics. 

Deals dropped in scale by 37% in Europe and 59% in the US over one year.  Low interest rates are damping down distress although a poll by adviser Duff & Phelps says average values will drop 10% this year. 

Advisers confirm family offices are sitting tight. The majority are looking for reasons to buy sectors, excluding retail, after the development of vaccines against Covid-19. 

Family Capital has identified 25 family offices who are the biggest investors in the sector and are likely to be players in 2021.

BlackRock economist Rupert Harrison, a former adviser to ex-UK Chancellor George Osborne, says the economic rebound will be far stronger than anyone expects.

Key factors include government spending, near-zero interest rates, pent-up demand and the growth of household savings during the pandemic.

Hedge fund manager Man Group believes the combination of monetary and fiscal easing will be inflationary. Prices could be further stimulated by erosion of global supply chains and conflicts affecting countries that supply commodities.

This should be good news for real estate, which acts as a hedge against inflation, often with the help of gearing.  Even if inflation doesn’t show up, property yields of between 4% and 6% are comforting. And there are certain sections which already look appetising, like the following: 

Residential and multifamily

Occupancy patterns have changed dramatically due to the pandemic. Rather than using gyms, cinemas, pubs and hotels, for example, people will see their homes as a hub for exercise, entertainment, work – and family life. Airbnb can provide an alternative to expensive hotel visits along with sub-letting. Spacious homes away from city centres which are capable of serving many purposes could attract a premium.

In North America, upmarket multifamily gated communities have become massively popular with family office investors.

A 2020 family office survey by Evergreen Property Partners found 75% of family offices favoured multifamily deals – far more than other sectors.

DJ Van Keuren, the report’s author, says tenants like them because they are secure and offer access to a range of entertainment and exercise facilities. The younger generation is keen to rent to maintain a lifestyle and cover their student debt. Older residents feel safe behind gates and visitor receptions.

Family business Drucker + Fulk has been in the sector for three generations and prospered. It has generated an average annual return of 30% from a luxury scheme in Virginia, which just sold for $113 million. 

According to data providers, average returns for multifamily real estate investment trusts has been 9.2% a year since 2016.

Paul Reichmann is best known for developing Canary Wharf office complex in London. His son Barry became one of North America’s multifamily developers.  The Steyn family office invests in 3,000 beds in 14 cities, and continues to expand.

Benchmark has an extensive multifamily business, whose partners include family offices such as the UK’s Mactaggart Family & Partners.  Blackstone is keen, paying $2.8 billion for 220 rented buildings in Japan this year.

Van Keuren says US multifamily developments remained popular during the pandemic but warns workforce accommodation could suffer when industries hit by Covid-19 lose government support. He sees a big future for quality multifamily outside the US. 

Agents Savills says overall residential assets, accounting for 27% of global real estate investment in their first three quarters of 2020 against 16% a year ago. According to their latest report: “Investors are not only seeking to diversify their portfolios but looking for stable income.” 

The number of residential property fund launches across the world are easily exceeding other sectors. Fund purchases often involve multifamily deals, although they can be small, and substandard, in Europe. Room for improvement? 

Offices and the green premium

Despite the attractions of working from home, investors are starting to believe we shall see a post-vaccine return to offices three to four days a week.

Bidders have already returned to the sector, suggesting that family offices may have missed the bottom of the market.

According to Richard Prew, managing director at investment bank Jefferies: “Working from home has its limitations, especially in collaborative industries. There is the risk that every weekend is a long one.  PwC is developing facial recognition software to check employees are at the keyboard time.”

Most employers say productivity falls off when working at home. There is an element of Zoom fatigue. Alan Carter of Stifel’s broking arm says peer pressure will facilitate the return, not least when employees start to wonder whether absence will harm their career prospects. 

Although new tenants were thin on the ground during 2020, new developments failed to progress, keeping supply tight. 

Either way, a growing number of investors are seeking to take advantage of a down market. Prime office yields have been driven below 4%, where they stood before the pandemic.

Family office adviser Pictet nailed down a yield of 6.2% by co-buying a £119 million office property in Manchester, a leading UK commercial centre.

An unnamed Pittsburgh-based family office snapped up a rare opportunity to buy McDonald’s head office in Chicago for $430 million.

Ten bidders figured in an auction for a building in London’s Clarges Street, bought by German investor Deka from British Land for £180 million, on a yield of 3.5%.

The brightest prospects attach to energy-efficient green buildings. Stifel’s Carter believes this is an important trend set to alter planning requirements and valuations.

Family office Topland, run by Eddie and Sol Zakay, only won permission for £85 million of offices in London’s Barbican by developing a green approach plus vegetation on its roof and terraces.

Property technology, known as prop-tech, is often employed to cut energy consumption. A system used by Deka adjusts office temperatures to cater precisely for expected usage and weather forecasts. Biophilia is a buzz word among designers using plants and natural lighting to create an alleged sense of wellbeing for those returning to the office.

Logistics and data centres

Logistics have become a hot property around the world, thanks to the growing reach of tech-driven product distribution.

Sector specialist LondonMetric Property confirms that yields have fallen to 4%, against a historic 7% for industrial space. It achieved a positive property return of 4.9%, roughly 6.5 percentage points ahead of losses generated elsewhere in the property sector.

The hottest area in the logistics sector comprises computer data centres, where listed US specialists saw growth of 19.2% in the half-year to June against a drop of 2.3% from industrial and a crash of 37.8% in retail. The top performer, QTS, jumped 61.4% in the year to July.

Goldacre, the family office of property entrepreneur Leo Noe, is an investor in Kao Data, which serves Cambridge. Legal & General agreed to chip in money in 2019. 

Pressure on providers to provide effective internet access to users working from home has been key to growth, plus the continued growth of global traffic. Agents JLL believe the upward trend will continue. The demand for secure premises has led to a “tight” market, where investors can negotiate uniquely long leases with users.

Retail property and the tenant revenge

Family offices are more cautious on retail property than any other part of the real estate sector. According to Glenn Mueller, writing in The Family Office Real Estate Magazine: “The new metric being watched is rents collected and that is still under 50% in retail. There are many challenges ahead.”  

Due to the growth of online distribution, the solvency of weaker retailers and landlords is under pressure. UK shopping centre owner Intu has gone into administration due to its high level of debt. 

Retail warehouses on a yield of 7.5% may be an income worth receiving if residential space can be added. New River Capital’s Allan Lockhart recently took up the role of CEO from his late father David. He is reviewing ways of converting parts of his retail estate to residential. 

New retail businesses are led these days by an online presence. Customised 3D printing products will form part of the mix. Tech-driven retailers will keep some high street premises as a shop window, like Apple, but they are unlikely to be generous rent payers. 

Tech-driven retailers are likely to browbeat landlords and a weakened peer group. They will often use their cashflow to buy their own freeholds. Food stores will seek greater strength by diversifying into clothes, and vice versa through virtual variety stores. 

In the next cycle, shares in leading multi-branded tenants are likely to eclipse retail property as it deals with its existential crisis. In a way, they will be the 21st-century answer to department store tycoons who started to dominate the High/Main Street a century ago.

Any retail power list would be led by Jeff Bezos’ Amazon, which has added food delivery to durables, and talks of delivering by drones and electric vehicles. Walmart, backed by the Walton family, also makes extensive use of technology.  

UK-based Mike Ashley’s Frasers Group has leveraged its strength in sportswear to buy into department stores and luxury goods.  JD Sports, majority-owned by the Rubin family’s Pentland Group, is in takeover talks with Debenhams.

Inditex, whose brands include Zara, is a past master in using technology to deliver fast fashion to shoppers.

It was founded by Amancio Ortega and his former wife Rosalia Mera. Ortega, said to be worth $66 billion, has invested heavily in property, including freeholds on Oxford Street in London.

LVMH’s Bernard Arnault, worth $119.4 billion is the only man in Europe richer than Ortega. His luxury business is supported by elegant shore chains. 

Farfetch, led by Portuguese billionaire Jose Neves, has used augmented reality to carve a strong online presence for luxury items. Alibaba and luxury brands firm Richemont have agreed to invest a total of $1.1 billion to bolster its China offering.

Wittington Investments, owned by the Weston family, is a long-term investor in top brands like Fortnum & Mason and Selfridges. But it also owns a majority of listed AB Foods which runs Primark, a successful value retailer, as well as property owner.

Ikea was built up by the late Swedish billionaire Ingvar Kamprad. It has spread across the world by using effective distribution to sell value merchandise. His children Mathias, Peter, Jonas and Annika continue to play prominent roles at the business.

US discount retailer Target Corporation is going global. Not a family business, but an impressive online presence, and a multiplicity of brands.