Family Office Real Estate

The real estate opportunities for family offices

The weight of money which boosted share prices a year ago has started to surge into real estate, seen as well-placed placed to offer investors a hedge against rising inflation.

Blackstone’s US real estate chief, Nadeem Meghji says: “In an inflationary environment, market rental growth for most real estate assets will accelerate.”   

Wealthy investors are seeking quality at depressed prices. Billionaire investors David and Simon Reuben have been snapping up prime hotels, like Venice’s Baglioni Hotel Luna

Fears of inflation have punished bonds as well as growth stocks, which rely on a stable economic outlook. But real estate is protected by lease structures. Even during the pandemic, most tenants paid their rents. Higher interest rates need not matter to real estate, as long as the underlying economy improves.

Howard Marks, co-founder of debt specialist Oaktree Capital says of rising inflation: “Even though we can’t predict, we should prepare.” He says rent-producing real estate has become an investment option.

Trevor Morgan, managing partner at family office and institutional adviser Morgan Capital, says: “There is a wall of money looking to invest in London, in the order of £30-40 billion.”  Other agents report a rapid increase in deal tempo this year. Global real estate shares rallied 36% in the year to March, according to FactSet.

Morgan has never seen so many private purchasers from so many different countries desperate to protect the wealth they have generated by buying property. 

According to Blackstone, property yields of 5.4% are 370 basis points above ten-year US Treasuries, against an average of 270 bps. And supply is unusually tight.

Niche sectors like logistics, life science parks, cold storage, film studios and data centres have grown fast as investors focus on growth niches generating a decent cash flow. 

Tech disruption can be a factor. Logistics, in particular, has racked up record rents, year on year, thanks to e-commerce deliveries.

This, in turn, has led to the niche demand for cold storage facilities, as consumers order chilled food from home. Hunt Southwest, controlled by the Lamar Hunt family, owner of the Kansas City Chiefs, has been highly proactive in the US.

The Oglesby family’s Bruntwood has moved with the times in the UK by investing £360 million in life-science parks with Legal & General plus Covid-19 testing. Money has flooded into the sector due to the pandemic and clusters of scientists have developed. A Blackstone fund recently sold life science premises to BioMed Realty for $14.6 million, suggesting a profit of $6.5 million. Agents say that rents paid in life science parks are higher than downtown 

Hotels have lately attracted buyers because they collect rents from guests on a daily basis and adjust them when needed, rather than locking investors into a fixed rental stream. Whether tourists return after the pandemic remains to be seen. But values have fallen by up to a half, as operators have struggled to cover their overheads and a healthy two-way trade has developed.

Wealthy investors are seeking quality at depressed prices. Billionaire investors David and Simon Reuben have been snapping up prime hotels, like Venice’s Baglioni Hotel Luna. 

Interest has also revived in retail real estate, as developers take advantage of low site prices in a bid to bring retail centres back to life. They are taking advantage of a relaxation in planning laws to convert retail space to residential and ferreting out independent traders. 

Ballymore, an Irish developer run by the Mulryan family, likes mixed-use schemes and local crafts at retail centres. According to John Mulryan: “Many years ago, Starbucks was a must-have first retailer. Would we be so determined to secure a similar brand today?”

He says developers need to help tenants cover fit-out costs, flexible leases, grants and loans.  All of this means retail owners are now viewing retail as a business that needs to be treated as an operating business rather than a source of rents. The same is true, in spades, for hotels, student accommodation and multifamily complexes.

This approach will come as no surprise to family offices who invest for the long term, as opposed to institutional investors out to boost returns, quarter by quarter. Shorter lease structures form part of the modern property package, forcing landlords to work hard to keep their tenants.  

John Whittaker’s Peel Holdings is taking this further by developing wind turbines and heat pumps to offer clean energy to its Ocean Gateway tenants in Liverpool. 

Across the commercial sector, landlords will need to take a sustainable business approach, as climate change moves up the agenda. Carbon and cost savings need to be negotiated with tenants.  

If owners can’t supply clean energy themselves, they are going to need batteries to service prime office, and residential, schemes. “This is a big issue,” said one analyst. “It will make, or break, leasing deals.”

Since its inception in 1957, Houston developer Hines has taken pride in its tenant relations. The family, led by Jeffrey Hines, is taking this to the next sustainable level by developing office blocks made entirely out of timber.

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