Asset Management

Property Retains its Allure for HNWs

Emma Rees, 11 February 2008

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Despite recent headlines of a weak housing market in the UK and property funds halting redemptions by investors, there is a still a keen interest in property in all its various forms amongst wealthy individuals.

Despite recent headlines of a weak housing market in the UK and property funds halting redemptions by investors, there is a still a keen interest in property in all its various forms amongst wealthy individuals.

Research by Citi Private Bank in conjunction with surveyors Knight Frank amongst UK residents with £5 million in investable assets, shows that property makes up 42 per cent of high net worth individuals’ asset allocation. The majority is in held in primary residences (23 per cent), 7.6 per cent in second homes, 4.2 in residential investment properties, 2.8 per cent in commercial and other property and 4.6 per cent in indirect property investments.

The services offered by private banks and wealth managers to meet this demand range from investing directly in property on behalf of clients, either individually or through syndications or “club deals”, to creating property funds. Wealth managers also use property unit trusts, investment trusts, REITs and investing directly in property shares to meet asset allocations requirements in their clients’ portfolios.

Catering for ultra high net worth individuals is Strategic Real Estate Advisors (StratREAL). According to group managing director Jeremy Gates, who likens the firm to a multi-family office, when StratREAL was set up 10 years ago, it filled quite a gap in the market as real estate funds barely existed:

“Potential investors would have to develop their in-house advisory skills and track record and try to get themselves on brokers’ deal lists. This has all the attendant hassle associated with property transactions”, he says. “We adopt a private wealth management approach to assist our clients to invest in real estate directly or via ‘Club Deals / Joint Ventures”. Our role is to advise them what to do and source the properties. This includes the strategy, finding the transaction, raising the finance, managing the assets and then advising them to sell them at the right time.”

Mr Gates says that the key is diversification and that StratREAL approaches clients’ property portfolios in the same way as a wealth manager would approach a wider portfolio. It acts on an advisory and /or co-investment basis and its family office approach is holistic, so it finds lawyers, accountants and so on:

“Our aim is to get under the skin of clients, understand their aims and objectives, encourage repeat business and build trust – being independent enables us to do this,” continues Mr Gates.

One criticism levelled at direct property investment is its lack of liquidity. Mr Gates agrees that direct investment in property is “lumpy” and requires a minimum investment of approximately £10 million to ensure diversification. “However, real estate is not a short term investment and listed securities are not a proxy for direct investments”, he says.

Gary Hill from Collins Stewart says that accessing property through syndications is a very pure play on a specific property, but does have liquidity issues:

“In fulfilling asset allocation requirements, we have to switch between sectors or classes on behalf of clients and can’t afford to sit in an asset we can’t sell. Funds tend to provide a more diversified exposure across sectors and countries.”

Two firms that create their own real estate funds for inclusion in their clients’ portfolios are London & Capital and Credo.

Credo specialises in acquiring and managing commercial properties in the UK and Europe and has made property investments in excess of £800 million. It targets commercial property with high calibre tenants on a long term basis and to clients with secure, long-term investments, structured in a tax efficient manner and capable of producing both rental income and capital growth. Credo also carries out bigger transactions that are too large for its funds, but which individual clients can get involved in, although they rarely buy specific buildings for individual clients. Stephen Davis from Credo explains his firm's approach:

"We operate closed funds with a five to seven year existence. They are not liquid and clients know right from the off that they can't pull out - and they trust us to achieve what we set out to. However, when we sell a property, they get the cash back as a return of capital plus dividends. We therefore don't have the problem of letting investors pull out on sometimes questionable valuations".

London and Capital has nearly £1 billion in funds across 85 properties, some of which it owns directly for clients. It has created three open-ended funds that invest directly in property, two focused on the UK and one on Germany. It adopts a low risk approach on behalf of clients:

“Our clients aren’t looking for mega returns over a short period. They tend to be high net worth individuals who have made rather than inherited their fortune and don’t want you to take risks with their money. Our funds invest directly in property and we use gearing – equity plus borrowing – to fund deals, but they are cautious and quite cash intensive. We adopt a transparent approach and clients come in regularly to meet the managers personally and see and feel what’s going on”, says Iain Tait, executive director.

Although low risk, L&C’s approach is focused. The London & Capital German Real Estate Fund is a case in point. Director of real estate Iain Keys says that Germany is attractive due to the purchase yields and low costs of borrowing and retail space in particular provides a fantastic opportunity after the depressed economic state of last 15 years. Germany has also proved resilient to sub prime worries as Germans tend to be savers rather than borrowers:

“When we research and pick an idea, we back it to the hilt. We like Germany as a story, so why dilute it? Pan European funds are too diverse and watered down”, says Mr Keys.

L&C’s funds are open ended so that clients don’t miss the boat, which by the time they decide to invest they might have with a close ended fund:

“Our German fund is distinct as there are hardly any open ended German funds”, says Mr Keys.

Whilst StratREAL operates a number of joint ventures with institutions, it emphasises that it is not a fund manager:

“As everyone jumped into funds, we decided to retain a traditional buy side advisory service for our clients. The JV's and club deals we have developed through trusted relationships with very specific strategies. We want to maintain relationships with clients – the structure must suit the investment strategy.”

Larger players like Credit Suisse also consider property is an interesting asset class to include in clients’ portfolios:

“But the question is how, how much and when”, says Credit Suisse’s Paul Sarosy. “There are many different methods depending on the risk factors, the profile of the client and the amount they have to invest”.

When choosing real estate funds, Mr Sarosy says that past performance alone is not sufficient:

“We look for real estate funds that have performed consistently within their risk parameters. It is important to do due diligence. The company background, compliance issues, analytics, the type of real estate fund, geographic location, and whether commercial or residential property are all important factors.”

Mr Sarosy emphasises that Credit Suisse adopts an open architecture approach and will always ensure that it uses the right product for the right client.

For clients with anything from £10 million to invest, Credit Suisse will start to consider investing in a private equity real estate product, depending on appetite for risk:

“In this instance, capital would be tied up for longer and clients would need to take a longer term view. Funds are obviously more liquid”, says Mr Sarosy.

Ultra high-net-worth individuals that have £100s of millions to invest may become quasi-institutional in their behaviour and look for a prestige landmark building to add to their portfolio:

“Due to our contacts, we often become aware of premier or landmark buildings coming up for sale in prestigious locations, like the Champs Elysee for example and we can help clients connect with and access such properties in a brokerage capacity”, says Mr Sarosy.

Credit Suisse can work with clients in a broker capacity to lend money to purchase the property, execute the deal and after a period of time help them to sell all or part of the property to other interested parties.

Citi and Knight Frank’s report also found that the biggest area of potential growth in property assets amongst high net worth is indirect investments and the appetite of wealthy for property investments is clear, but is it always a suitable investment?

Mr Sarosy says that a quality organisation should gain as clear a picture as possible of the individual client, looking at the entirety of their assets which would likely already include land, real estate, both commercial and residential:

“It’s important to look at it in a holistic way and gather as much information as possible”, he says.

Focusing on commercial property, London & Capital has deliberately stayed away from the residential market in part because the management is more intensive but also because most people already have big exposure to residential property through their own homes.

Collins Stewart looks for value in property on behalf of clients across open-ended and close-ended funds, as well as REITs:

“Personally I think that commercial property is an important diversifier. Property funds are a bit like an index linked bond. They can provide a good income stream from good quality tenants. They have an in-built inflation proofing as the income stream from rents goes up in line with inflation (in Europe). The correlation to equities is low and there can also be improvements in the capital value of the funds,” says Mr Hill.

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