Asset class Real estate. Wealthy investors and family offices are continuously expanding the proportion of real estate in their portfolios. Thomas Wiegelmann, Managing Director at Schroder Real Estate, and Morten Bennedsen, Professor of Family Business at INSEAD University, explain why an investment in real estate is attractive and how it is intelligently implemented.
Even before 200 Jahren the banker Nathan Meyer Rothschild had issued the slogan that one should wisely invest a third of one's assets in land. Today - in times of creative monetary policy and monetary dilution - many wealthy people and family offices are thinking of this wisdom. "According to the UBS/Campden Wealth Global Family Office Report 2019, the average share of direct real estate investments in the portfolio among survey participants is around 17 percent. In Europa, according to the study, it is even 19 percent," informs Morten Bennedsen, professor at INSEAD.
One third of the family offices surveyed also plan to expand direct real estate investments in the short term. "Family offices don't just strive to generate the highest possible returns. It is also a matter of conservatively safeguarding and preserving the value of assets for future generations," explains Bennedsen. But this is not the only reason for a strong real estate foundation in the portfolios. "Many affluent families," explains Thomas Wiegelmann, Managing Director of bei Schroder Real Estate, "are active entrepreneurs. A further major motivation for family entrepreneurs and their family offices is therefore the desire to distinguish assets from the operating family business and to secure them through long-term, professionally managed real estate commitments. This trend is also accentuated by the sometimes considerable challenges faced by family businesses as a result of disruptive developments, which can have a considerable impact on the stability of business models and markets".
In addition, generational changes and handover situations in family businesses often give rise to the decoupling of part of the assets from the family business. "Real estate investments make this possible and make sense not least from a portfolio perspective," adds the expert: "In view of their comparatively low correlation with the stock markets, real estate is particularly suitable for diversifying the portfolios of family offices, which consist of equities, bonds and other alternatives.
Above all, the variety of possibilities is convincing. "They allow the real estate asset class to be covered by a broad spectrum of investment strategies with the corresponding return and risk potential - from 'core' or 'core plus' through 'value add' to 'opportunistic'," explains Wiegelmann. For many family offices and other institutional investors, it is particularly interesting that stable and comparatively robust cash flows - and thus solid distributions - can be achieved with real estate.
In practice, family offices usually concentrate on first-class real estate at the outset. Once they have gained confidence in the asset class, the risk curve is often high and attractive returns on equity can be generated in the overall portfolio. "In most regions, especially in Europe, very attractive spreads can now be achieved with acceptable risk profiles compared with investments in bonds," explains Wiegelmann. Another aspect should not be neglected either. "Revenues are partially inflation-protected, as rental contracts typically link them to inflation or other indices."
In addition, family offices are now able to leverage real estate values over the long term with low-cost loans, thus optimizing cash on cash returns and internal rates of return.
Investors basically have two options when it comes to implementing their real estate strategy. In the case of indirect investments, they buy shares in open-ended or closed-end funds or in listed and private real estate companies. In of the direct variant, a property or a certain portfolio is acquired as a direct investment.
"An indirect investment is often seen as an uncomplicated and quick solution for more 'passive' family office investors," explains Wiegelmann. The advantage lies in the fact that a higher degree of diversification can be achieved, particularly in the case of investments in larger fund portfolios. It also gives investors access to products in special areas, themes or special property types. And they can choose from commitments in geographical areas.
Another advantage is that fund managers are typically subject to regulatory requirements and governance standards. In addition, some family offices in listed funds consider the higher liquidity of equities and the associated rapid exit to be advantageous.
"A major disadvantage of the majority of indirect investments is the often fixed maturities. This is not an optimal solution for long-term family offices," analyses Wiegelmann. In addition, there would be risks if market conditions and values were to develop unfavourably at the defined exit point.
A further drawback could be the limited flexibility of indirect real estate investments in the event of changes in fund strategy or investor preference. "Then consensus among investors is necessary. The associated need for coordination entails risks."
According to Morten Bennedsen, transparency must also be observed. "Prior to the 2008 financial crisis, many funds were structured as so-called blind pools. Investors therefore made capital available to a manager without knowing in advance how exactly they were investing, often along widely defined investment principles. Das went wrong in some cases." Since then, according to the scientist, family offices and wealthy investors have attached more importance to transparent structures and direct influence.
"The great advantage of direct investments in real estate is therefore that investors can make their own decisions and control significant value drivers of the real estate investment," Wiegelmann explains. In particular, this concerns the real estate and financing strategy to be regularly reviewed, the investment criteria and the concrete selection of the properties. But also the decision when to invest or divest or when and how to increase the value potential of properties through development or modernization measures as well as concrete lettings.
"Direct investments, however, will only bring the desired long-term success if sufficient human resources, relevant experience and access to attractive investment opportunities are available", macht Wiegelmann clearly. Above all, according to the expert's experience, a geographically diversified or even global investment strategy is often lacking.
"We see Family Offices making many direct investments in their well-known regional markets. This creates a geographical concentration." In order to achieve the desired diversification, it therefore makes sense to fall back on professional investment managers who can demonstrate a long-term success story in their respective markets or with their respective specialisation in certain property types. The selection of the right partner is decisive and sometimes represents a challenge for family offices.
Also a third way gains more and more importance - the so-called Club Deal. Several private investors or family offices invest together as part of a partnership or joint venture. "This has several advantages - the investment sum for the individual commitment is lower. This enables greater diversification and reduces the cluster risk. Vor but above all, co-investors can use the expertise of a trusted and well-known lead investor", erläutert Wiegelmann.
In order for this to work in the long term, it is important that the values and investment approach of all partners are the same. "Equal interests, clear rules and the capabilities of the lead investor are decisive success factors," emphasizes Wiegelmann. "From my experience, Family Offices also like to team up with partners who not only share the desire to generate attractive returns, but also have a reputation to lose and value long-term relationships".
It is therefore important for the managers of family offices to consider the essential characteristics of direct and indirect real estate investments when designing their investment strategy and implementing it. "High-quality real estate is well suited to the preservation of assets and can generate considerable capital growth over long holding periods," concludes Thomas Wiegelmann, concluding: "This makes it a long-term source of income that is particularly relevant at the moment when it comes to fundamental and cross-generational investment strategies and goals.
Schroder Real Estate - the facts.
For more than 200 years, Schroders has cultivated a partnership relationship with its clients and has remained true to its principles: a global, independent company with more than 5,000 employees, including 740 investment professionals, present in 29 countries but managed locally.
Schroders can offer its investors access to a wide range of asset classes, from traditional such as equities and bonds to alternative investment opportunities and modern multi-asset solutions, all backed by intensive in-house research. Worldwide, investors have entrusted the company with assets of 496.6 billion euros. The private asset business includes the real estate segment. Schroder Real Estate manages a global portfolio of over 18 billion euros with a team of over 200 real estate professionals, of which over 40 employees work in the DACH region alone. The real estate assets managed in Germany, Austria and Switzerland amount to around four billion euros (as of 30.06.2019).
Schroder Real Estate thus has a significant presence in Germany, Austria and Switzerland and has successfully invested in almost all asset classes in the local investment markets. Our clients also include a large number of well-known national and international family offices that rely on the company's many years of experience.
Schroder Real Estate
Dr. Thomas Wiegelmann,
Managing Director at Schroder
Real Estate, Member Harvard Alumni Real Estate Board
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