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EXCLUSIVE: Single Family Offices' Real Estate Investments: The Shadow Of COVID-19
18 May 2020
Single family offices have long regarded investment in real estate as a core element in their overall portfolio. Statistics from the Global Single Family Offices Database from Highworth Research and WealthBriefing – which is media partner to this organisation - show that the asset class ranks third in family offices’ allocation preferences, with 74 per cent of family offices globally outside the US investing in property. (To receive information about accessing the Highworth Research database, click on this link.) SFOs allocating to real estate Investment in retail
Only private equity and public equities rank more highly, with respectively 83 per cent and 76 per cent of single family offices allocating to these asset classes.
Top ten countries for family office real estate investment
Does allocation to real estate vary by country? The Single Family Offices Database shows the following percentages of SFOs in each of the top 10 countries allocating to real estate:
There are some interesting takeaways from this list:
-- If the oil price recovers the Gulf states may not have a problem with overweight allocation to real estate except for Dubai where the economy is excessively dependent on inflows of tourists to sustain the hotels sector and expat businessmen to rent apartments;
-- It is surprising that Hong Kong is not higher on the list given the enormous value of property in the territory; and
-- German SFOs appear to have a healthy, well-balanced approach to real estate investment – not too much, not too little.
Winners and losers among property investment sectors
Does family office investment in real estate vary by property sector? At a time when the coronavirus overshadows most investment decisions, real estate has winners and losers depending on sectors. The Single Family Offices Database can be interrogated to show which SFOs invest in which property sectors, and therefore which may be facing enhancement or impairment of the value of their property investments.
Family offices which hold investments in offices, retail, mixed use, and hospitality, will have serious concerns at present. Those which have investments in logistics and warehousing, agricultural land, some types of residential property, and certain specialised property micro-markets, will be more relaxed.
Investment in office property
COVID-19 has made many companies re-think their approach to the need for office space. Jes Staley, CEO of Barclays, has said that placing “7,000 people in a building may be a thing of the past.” Land Securities plc, with a property portfolio valued at £12.8 billion ($15.2 billion), reported on 12 May that only 10 per cent of the company’s offices were occupied. The new normal of home working may continue to a large degree in the future.
The outstanding example of a family office investing at substantial scale in the international office property market is Pontegadea, the SFO of Amancio Ortega, the founder of the “fast fashion” company Inditex. Inditex’ dividends paid to Pontegadea over the past three years have been well in excess of €1 billion ($1.08 billion) a year, and most of this has been invested in office buildings in prime locations in Europe and the US. The family office’s real estate portfolio had a value of €13 billion in March 2020. Will Mr Ortega’s investment advisors now aim for greater diversification of his assets post the coronavirus? The jury is still out.
Retail real estate, already under threat from online shopping before the virus hit, now has to cope with the double whammy of the lockdown keeping consumers away from many types of store. Again, Land Securities wrote down the value of its estate by £1.2 billion in May 2020, of which £800 million was due to “the structural shift from retail” according to CEO Mark Allan, who claimed, “The virus is expected to accelerate the decline of high street retail and shopping centres.”
Over the past 20 years single family offices have been big investors in shopping malls in certain countries. In Dubai Majid Al Futtaim is the largest developer and operator of malls across the Gulf and North Africa, running 21 malls. Al Ghurair Investments follows close behind. If tourist and expat flows to the Mideast diminish over the next few years, that concentration of family capital in retail real estate will become a major issue.
In Australia, family capital has long been invested in shopping malls but there’s an interesting difference. LFG Holdings, also known as the Lowy Family Group, is the family office of Frank Lowy. The core of the family’s wealth lay in Westfield Corp, developing malls internationally, and Scentre Group, developing malls in Australia and New Zealand. In 2017 the Lowy family sold out their 4.07 per cent stake in the listed Scentre Group, and again in December 2017, sold Westfield to Unibail-Rodamco for $24.7 billion, retaining a 2.5 per cent stake in the enlarged group but taking the bulk of their sale proceeds in cash. Similarly, Australian Sam Alter, whose family office is Albany Capital Investors, sold a 50 per cent stake in two of his largest malls in July 2018 for $692 million.
Foresight? Lucky timing? Whichever it was, two of the biggest mall owners in Australia will be largely unharmed by the impact of either COVID-19 or online shopping on retail malls.
Hotels and hospitality
Hotel ownership has always been a favourite real estate sector for some family offices. There are 121 family offices, or 13 per cent of the current total of SFOs on the Highworth Single Family Offices Database, which have investments in hotels. Having to shutter those assets at the present time is painful.
But one or two avoided the problem, among them a family trust associated with Ellerman Investments, the family office of the Barclay brothers. In 1995 the Barclay family purchased the London Ritz for £75 million. In March 2020, a few days before the virus lockdown began, the family, despite internal dissension, sold the Ritz to an unidentified Qatari investor for a price reported to be in the range of £700 million - £900 million.
Family office resilience to real estate impairment
There are two main reasons why those family offices which are exposed to what are currently the weakest segments of the global real estate market, will not suffer lasting financial damage.
The first is that despite being the third most popular asset class among family office investors, real estate in most cases is part of a diversified portfolio of assets. True, a few SFOs are overly dependent on the most vulnerable types of property which will take longer to recover from the impact of COVID-19. However they comprise less than 3 per cent of the total of 930 single family offices on the Highworth Database.
The second reason is that most single family offices invest for the long term. Two or three years of severe downturn is tolerable when seen in the context of a family investment plan designed for several generations.
In a second article to follow, we will deal with single family office investment in those sectors of the real estate market which are proving resilient to the virus' impact.
Single family offices have long regarded investment in real estate as a core element in their overall portfolio. Statistics from the Global Single Family Offices Database from Highworth Research and WealthBriefing – which is media partner to this organisation - show that the asset class ranks third in family offices’ allocation preferences, with 74 per cent of family offices globally outside the US investing in property. (To receive information about accessing the Highworth Research database, click on this link.)
SFOs allocating to real estate
Investment in retail