By ERIN CHAN DING
The rocky real estate market has family offices revising some long-cherished strategies for investing in real estate.
Across the board, real estate investors are pulling back dramatically on home buying, with purchases falling 46% year over year in the fourth quarter, according to a report released last week by Redfin. The drop-off represents the largest decline in investor-led purchases since 2008, when investor purchases fell 45.1%, according to the report.
Rising rates in “advanced economies” have had a worldwide effect on real estate, resulting “across the board in problems in servicing existing loans, refinancing existing loans, buying new properties, using new loans that might be more expensive,” said Michael Kovacs, a founding partner at London-based Castleforge Partners, a global private equity real estate manager. “And it makes the properties that you’re buying at the old prices kind of unattractive.”
However, investors such as Kovacs and family-office advisers remain confident in real estate as an alternative investment and see this as a time when families can study the market for opportunities.
Because a significant portion of family offices often own businesses that still run and produce cash in unsettling market cycles, the downturn in real estate pricing could present “new opportunities for investors with capital,” Kovacs said. “Oftentimes, it’s only the family-office investor that also has the capital to take advantage of that. So I do think that family offices, many of them are probably primed for the ability to take advantage of the difficult times in real estate.”
WHY REAL ESTATE INVESTMENT?
Family offices whose businesses do not depend on real estate often incorporate real estate investments into their portfolios for three main reasons, said Aaron Bates, the Boston-based head of ultrahigh-net-worth and growth strategies at Bernstein Private Wealth Management:
Nancy Curtin, chief global investment officer at New York-based Alvarium Tiedemann or AlTi, a global investment management firm and multifamily office, said rents are often indexed to inflation, meaning real estate gives family offices “natural inflation protection and capital appreciation.”
“But most interesting to a family is it’s tangible. So when we offer these real estate opportunities, they can go out, they can see them, they can touch them, they can go visit their properties. And clients like that, and they do understand that being in the right place in real estate is an important component of a long-term investment portfolio.”
What’s more, Bates said, “In a higher-risk environment such as the one we have today, real estate plays an outsize role in how families view real estate within an overall asset allocation.”
NOT BUYING OR SELLING, BUT WAITING
In his conversations with family offices, Bates said he has learned that several are assessing urban areas such as New York and Los Angeles for opportunities.
“The key here is they’re looking,” he said. “But what I’m hearing from a lot of family offices we work with is that they aren’t necessarily acting on acquisition right now. But they’re also not selling, so they’re holding their existing real estate holdings, reevaluating them from an income perspective, not necessarily selling into this market and then eyeing the market for opportunities to determine when in this cycle is the most appropriate time to step in.”
Amid the uncertainty in real estate, Bates said, he has not seen a decline in interest in qualified opportunity zones or QOZs, particularly because family offices are often values-driven and looking to make a difference with their real estate investments.
And of course, there’s the tax savings.
“I can speak with a sort of high level of certainty that it is ubiquitous across the family-office space that family offices are always looking for ways to minimize tax,” Bates said. “And a QOZ is one way that one can minimize tax.”
AlTi is focused on “quality real estate with great tenants and growth areas,” Curtin said, particularly opportunities such as multifamily housing, student accommodations, e-commerce and industrial parks.
Strategically, she said, AlTi stays in growth parts of the real estate market where there’s a deficit in supply versus demand, such as in the Sun Belt.
“The rents may not go up as much as they did in prior years,” Curtin said, “but they’re still pretty firm. And there’s still migration.”
Kovacs of Castleforge Partners said a lot of the family offices he works with are increasing their real estate exposure and buying into the dip. But family offices can no longer just buy a building and let it sit, he said.
“They’ve got to figure out if they have the local presence and expertise to best maximize a property’s cash flow potential,” he said. “If they don’t, it may make sense to work with a local partner who knows how to navigate in a particular market and generate the maximum cash flow from a particular property.
“That kind of honest awareness and an assessment of one’s own capabilities will probably serve a family office best in this volatile environment."
CORRECTION
An earlier version of this story gave the incorrect headquarters city for Alvarium Tiedemann. This version has the correct city.