While many in the UK have been distracted by the Brexit referendum, it is important to bear in mind that global markets have remained active and that real estate capital values are up or stable in nearly all markets.
Brexit is yet another example of the uncertain environment in which we operate, and with interest rates persistently low, investors are increasingly viewing real estate as the bedrock of their portfolios.
That was certainly one of the main findings of this year’s UBS/Campden Wealth Global Family Office Report. In 2015, family offices returned an average of just 0.3% compared with 8.5% in 2013 and 6.1% in 2014. Within this, the largest negative impact was derived from liquid market instruments, while it was private equity and real estate that outperformed other asset classes in 2015 and saved many family office executives the indignity of delivering overall portfolio losses.
It was also the comparatively high allocations to private equity and real estate that led European family offices to marginally outperform their peers, delivering an overall return of 0.6% in 2015. The IPD Global Property Fund Index showed a total return of 13.5% for the same period.
While some divergences in central bank policy may now be opening, global investment markets continue to be dominated by the effects of low interest rates and the relatively hawkish Fed is moving upwards only gradually and incrementally. As a result, bond returns are desultory and the healthy premiums offered by real estate, as well as its predictable long-term income potential, is relentlessly attractive.
Family offices around the world have been ensuring that a healthy percentage of their assets are allocated to real estate: 15% of the average family office portfolio is allocated to direct real estate investment, a figure which rises to 19% if we look at European family offices in isolation. Globally, only developed market equities are awarded a greater portion at 18%, with private equity/direct venture capital in third place at 11%.
What’s more, support for real estate is growing, with 42% of family offices indicating that they expect to increase their direct real estate allocations and 26% planning on increasing their REIT allocations. Within this, the UK and Europe remain at the forefront of thinking for investors, both institutional and family offices, especially for Middle Eastern investors driven by the instability that persists in the region.
Three trends emerge from a UBS analysis of this demand for real estate investment opportunities among family offices. First, some are seeking global diversification within a diversified and relatively liquid mechanism focused on income and low volatility. This can be successfully achieved through judiciously blending third-party fund investments.
Second, investors are happy to participate in club transactions directly, gaining access to interesting, income-producing properties in European markets, with the expectation of enjoying strong income flows underwritten by economic growth.
Third, some family offices, particularly the largest and most sophisticated, are being helped in creating their own diversified global portfolios.
Investors from different parts of the world have different strategy drivers. For some it is the stability, security and income streams offered by deep, efficient markets that fulfils their balanced strategy expectations.
Despite the volatility of global equity markets, growth is firmly on the agenda for many real estate investors. There has been an increase in the percentage of family offices pursuing a real estate growth strategy, from 29% in 2015 to 36% in 2016. In practice, this desire for growth means increasing already-popular investment holdings, real estate included, and so exposures will be reinforced rather than diversified. It is interesting to note here that, in contrast to 2015, the expectation among some family offices is that residential property will outperform commercial real estate in delivering annual returns.
The breadth and depth of capital sources is as great as we have ever seen and as the pricing of property tightens in some markets, the ability to access and invest wisely naturally becomes more important. Family offices will play a bigger and more diverse role in this environment. They, like us, seem to relish the challenge.
Richard Johnson is global head of business development, UBS Asset Management
