Bill and Melinda may be getting divorced, but they won’t be separating from their wealth.
The Gates’ are not the only ultra-high net worth (UHNW) individuals keeping a close eye on their money in 2021. The family wealth of the world’s super-rich – managed by so-called ‘family offices’ – has become one of the biggest drivers of the global property market. And its effects will be felt in your world very soon.
Of course, family money has always mattered to real estate. But today, thanks to a decade of quantitative easing and loose monetary policy, there are more UHNW individuals than ever. There are now 2,500 billionaires – more than double the total in 2011.
The super-rich want their huge resources to work for their families, and the informal asset management teams they assemble (which is what ‘family offices’ are) exist to make sure that it does. There are between 6,500 and 10,500 family offices in operation, according to Credit Suisse.
Estimates are unreliable (because family offices are private) but even allowing for this, the scale of the wealth under management is eye-popping.
Recent analysis suggests family offices have something like $4 trillion under management, but that could be miles off the mark. In 2019, the figure was said to be $5.9 trillion, out of $9.4 trillion of wealth. Things will have improved since then: UBS say family offices did well out of the pandemic. Either way, it dwarfs the global hedge fund sector, and rivals private equity. Much of that money is going into the traditional home for dynastic wealth: property.
Late last year, Colliers predicted that around £60 billion will be invested in UK real estate in 2021. Today, with major economies bouncing back quicker and stronger than many had expected, that figure is likely to be an understatement thanks to family offices seeking higher returns from real estate than they can get from stocks, equities or gilts.
Again, estimates vary, but family offices allocated about one-sixth of their funds to real estate in 2018 (according to UBS/Campden). The consensus seems to be that it has risen to about a fifth today, and in Europe to as much as a quarter. That is a seriously large amount of money.
And because family offices are largely unrelated, answering only to the families that control them, they can take gambles other kinds of investors would avoid. This means bigger bets, at higher levels of risk, offering potentially higher returns.
The recent furore over the activities of Archegos Capital Management, a family office whose investment choices gave London and New York a serious jolt, shows how the vast resources of family offices can make the market move. Archegos also showed how serious the consequences can be if they move it in the wrong way.
So what are family offices looking for? Where will you begin to feel their influence in 2021?
1. London offices
The office is dead, long live the office. This is the way many family offices are thinking as they review their options for the three-to-five year medium-term. They see opportunities to make money if they invest in the right kind of well-located, super-smart office floorspace. They also see risks, but not the same risks you see: the big risk in the mind of family offices is missing out in case workplaces yield higher returns than expected.
London’s reputation as a safe haven and (still) a global financial centre makes it feel like one of a handful of global office markets that will prosper, whatever the coronavirus/working from home fall-out.
Knight Frank estimates that £46 billion is hunting for London office floorspace this year. This could be destabilising. Why? In 2019, the last sensible year for which we have data, total London office investments topped £15 billion. That means there is roughly £3 chasing every £1 of potential deals, and that in turn means prices go up (and yields go down).
The result could be an acceleration in the pace of new development. Today, Knight Frank estimates around 27 million sq ft is in the London office pipeline, but only 3.2 million sq ft is stated for speculative development by 2024. Whichever way you cut it, that’s not a lot. Investors have every reason to nudge developers into providing the amenity-right, high-specification offices they think will prove to be of enduring commercial value.
Because family offices are investing in tech businesses, they think they understand the kind of real estate the post-COVID tech world will require. It also suits their approach to buy into the operational business and the real estate it occupies.
Faisal Durrani, Head of London Commercial Research at Knight Frank, says: ‘Even in a globally stressed environment, international investors, without a doubt, remain committed to London in 2021, even if not all of their capital can, in practice, be deployed during the space of one year. And as the world’s number one city for cross border investment and the top city for cross-border private investment during 2020, the resilience of London’s appeal cannot be understated.’
Family offices like ‘trophy’ buildings that reflect their own sense of importance. They will also become involved in club and joint venture purchases: in that case, it may be hard to spot that family money is involved.
2. Wild cards
Family money can take risks that might make other investors hesitate, which is why there will be some wild cards. They also like to diversify and, where they can, family offices prefer direct investment in operating businesses as well as investing in the kind of real estate those businesses use.
Keep your eye on anything with a food and beverage angle. This stretches from competitive socialising, through restaurants and bars, to home delivery of food or food ingredients. This spectrum of interests drives family offices into the UK leisure sector, warehouses and last-mile distribution centres, and repurposed city centre properties.
The names Weezy, Getir, Dija and Gorillas might not mean much to you if you live outside London, but these are the highest profile names in the growing food delivery business. Family offices are investing heavily. Weezy plans to have more than 50 UK fulfilment centres, with the aim of getting deliveries from warehouse to front door in just 15 minutes.
This growth sector is leading investors deeper into the bar and restaurant scene. What family offices want are leisure concepts appealing to high-spending groups, with the potential to grow into national networks. Concepts offering relatively strong returns (high single-digit), growth potential and an extremely fast return on investment (12-18 months) are favoured.
3. Sustainable properties
Family offices inevitably look to the next generation, and their focus on environment, social and governance (ESG) in their property purchases is expected to increase. Advisors say they are now on the look out for projects with conspicuously good green credentials and a strong wellbeing profile. This will help inspire their investment in the office sector and help them pick winners in the food and beverage business, both of which will have profound consequences for real estate. Projects that tick family office boxes stand a vastly better chance of success than those that don’t.
4. Distressed assets
Family offices are generally allergic to off-prime or off-pitch property: they can afford the best, so why buy second best? But we live in a world of low interest rates and low returns. Family offices are often hunting for higher rates of return than traditional investment options can offer, and this inspires them to push their choices further up the risk curve, where rates of return are that little bit better.
Distressed property represents a real opportunity, especially if you think it has ESG potential and/or fits into the family office view of the future of workspace and the leisure sector.
Repurposing shopping centres could be one of the most promising areas for family office activity. Under priced, unloved but often well located, they offer a real opportunity. This opens the door to repurposing former retail floorspace for high value uses like build-to-rent housing, student accommodation, coliving and hotels/hospitality. There is also scope for workspace related development – and all at low entrance fees.
Of course, some family offices have been here before: the word on the street in 2016 was that values in the retail sector had not reached the floor, and that it would be a great time to buy an unloved shopping centre and convert it into something more lovable. The sad fact is that retail values had not reached the bottom by 2016 – they may not even have reached the bottom today – and family offices who got caught out back in 2016 are reluctant to take the same risk again.
That said, family offices are first-rate bargain hunters. Major city centre and town centre development and the growth of the BTR sector probably depends on them.