Family offices are an eclectic bunch of investors with many differing views on real estate allocation. But post downturn, a common trend can be seen in the shift from complex products to something more tangible and transparent, as Christine Senior reports

Confidentiality, discretion and secrecy are attributes commonly associated with family offices. No surprise then that information about their investment strategies is hard to come by. They give little away, except to their most trusted advisers, about what they do and what they plan to do with their wealth.

Perhaps that explains why quite a lot of information coming out about family office attitudes to real estate seems to have no common theme, and quite often is conflicting. Some commentators say family offices regard real estate as a core asset that is important to them; others that they invest little in it. Some say they focus on prime trophy buildings; others that it is opportunistic deals that interest them. Some say direct investment is favoured; others that it is funds and club deals. The reality is that there are probably as many attitudes and strategies as there are family offices.

But a number of surveys by organisations advising family offices have uncovered some more detailed information about family office investment activity.

Scorpio Partnership, a business strategy firm focused on wealth and asset management, conducts research that provides regular insight into the needs of the ultra-high net worth and family office community. Last year it researched the private equity industry, which reflects real estate investment at one end of the risk spectrum. On its general findings about investment attitudes it found that private equity was considered a key asset class, first because the majority of the families made their fortunes through business ventures, so they have an affinity with the asset class, and second, because private equity allows them some influence on management.

Real estate is a current topic of interest that Scorpio will be examining in more detail later this year.

Family Office Exchange (FOX) has surveyed 83 US-based single family offices. The study, published last year (a new survey is due out shortly), covered families with average investible assets of $330m (€223m), and found they had an average 6% allocation to investible real estate, which did not include their primary residence or vacation homes. Asked about their investment intentions for 2010, 30% said they were planning a change, with a majority planning to increase their allocations.

One thing is clear: allocations to real estate vary wildly between families and family offices. Some, particularly those with a special interest in real estate, or whose family wealth was made through it, tend to have higher allocations, while for others it barely registers in their portfolios. Any average figures should therefore be treated with caution.
Serena Althaus, senior managing director at Ferguson Partners Europe, describes family office and high-net-worth investors' attitude to real estate as "fluffy".

"They never give a hard allocation to real estate," she says. "They give a soft fluffy figure. One of the family offices we are about to start working with has said they will give a €200m soft allocation. If the market turns against real estate they don't have a long-term appetite. They are about absolute returns; they don't have the same attitude as investors who were specifically investors in real estate funds."

On the other hand Laurent Gabert, real estate specialist at Pictet Alternative Investments, says real estate forms a core element of many family office portfolios.

"A large number of family offices are looking at real estate as a core basis of their portfolio that could provide them with income," he says. "Given the situation with inflation fears, they also see the asset class as an inflation hedge. A good example of that is the strong move family offices have made over the past two to three years to buy core and prime property in major cities in order to have cash income and an inflation hedge."

In addition to the data from its survey, FOX was able to gather anecdotal evidence on attitudes to real estate from its investment council where member families and family offices share views on investment.

Charlie Grace, senior partner at FOX, says: "Single-family offices that are most interested in real estate are the ones that have perhaps an expertise in that space - they may have staff in-house, or it may be that their original wealth came from real estate, so they understand the asset class. Those families have much higher allocations and an ability to evaluate private real estate opportunities."

One trend that FOX has found from its investment council is a tendency for family offices to enter into private deals on an opportunistic basis.

Grace says: "They are also interested in smaller deals and transactions that go under the radar and that perhaps have not been looked over as much, as there are more price inequalities and dislocations. It's not so much they are saying we want to increase exposure to real estate, they are looking for individual opportunities that are valuable."

And a third type of entry to real estate investing is through credit instruments and loans. "It could include CMBS, but it tends to be more individual loans," says Grace. "Sometimes it's individual loans held by commercial regional banks that are of interest. We have even seen some families, when they have a lot of expertise, buying smaller banks in part to be able to take advantage of any discount on pricing they get in the loan portfolio that bank may hold."

Investing in real estate via debt securities is an opportunity that JP Morgan is particularly positive about and has been successfully executing over the past couple of years. This strategy has found favour with some of its family office clients, who are convinced by potential returns of 7-8% on AAA commercial mortgage-backed securities.

"We have spent our time on education for investors because I think most families thought about themselves as equity investors in real estate, but the reality in the last three years is that the opportunity has been about debt," says Rhian Horgan, international head of alternatives at JPMorgan Private Bank.

But not all family offices have the ability to manage these types of investments themselves. "CMBS can be very complicated, many of the tranches have upwards of 100 underlying properties in them, so depending on the family office, they may not have the team and analytical tools in house to be able to do the analysis themselves," says Horgan. "We had a large number of family offices that realised there was an opportunity set there that they couldn't execute on themselves but they saw the opportunity and realised they needed to hire someone to execute."

For equity investment in real estate, the choice between direct holdings and indirect exposure through funds varies according to investor type. Single-family offices are likely to take a different route from multi-family offices, according to Scorpio.

Bill Yelverton, executive director at Scorpio Partnership, says: "Single-family offices are more likely to be candidates for direct investing, while multi-family offices may invest in a fund structure to account for different family allocations. Direct investment may be used to acquire trophy assets in key locations, whereas regional funds are used by family offices that lack expertise in a given region."

The size of the offices also plays a part, with smaller entities more likely to opt for funds, says Yelverton. "Depending on the size of the family office structure, they may not have the administrative capacity to manage a direct real estate portfolio, so will turn to a fund structure to have exposure to the asset class."

In some of these strategies family offices are following the same route as pension fund investors: direct investment in their domestic market, using funds for international exposure, and for diversification; or fund investment for smaller-scale investors, direct for those with more resources at their disposal. Likewise, club deals and joint ventures with like-minded investors are on the increase.

The direct indirect/decision depends on the types of exposure they want and the level of investment they plan to make, says Horgan.

"I think the question of whether they want to go direct is around size and concentration. How much exposure does a family want to one city, one property or one tenant? I find families are using fund vehicles frequently to ensure they get that diversification. It also depends on the family business. If it's a family that is an operator of real estate themselves, of course they are going to be going direct."

Gabert thinks that family offices are using the whole spectrum of access vehicles to serve different purposes in their portfolio. "Real estate is a wide asset class," he says. "So within the portfolio they can have a gradation between physical assets they hold for the long term, and investment vehicles where they can play the cycles and trends in the market. They can look for geographic diversification through these investment vehicles whether listed or private."

Funds, he says, can be an entry point for family offices to gain experience in the asset class before moving on to direct investment.

"Some of the most astute players in the field could use private real estate fund investment as a first step to access the real estate market in a professional way. They invest in that to get more comfortable with the asset class, then at a certain point they take another step forward and decide to acquire a portfolio of buildings."

A further element, though less common, has been where investors have co-invested with managers, as a preliminary to taking over the whole fund.

"You can even see in the market a kind of gentleman's agreement between a fund and a family office where the family office invests in the fund with the objective of taking over the co-investment when the fund wants to exit," says Gabert. "So most of the work has been done by professional investors and then when the assets are stabilised the family office takes a longer view and long-term holding of the assets."

Club deals have proved a popular choice for family office clients of HSBC Alternative Investments. "A lot of clients found they were tied up in fund vehicles which weren't very well suited to them after the downturn," says Paul Forshaw, head of real estate fund management. "The club deal programme was born out of the requirement to offer something more transparent and flexible." Each deal - and the programme is based around investments in mispriced assets across the risk spectrum - has between five and 20 investors depending on size, and investors have to be prepared to sign up to the five- to seven-year lifespan of the club.

Like institutional investors, family offices can opt for a segregated mandate with HSBC for real estate, provided they have the necessary level of capital to invest. A minimum of $150-200m is the starting point, with the expectation this will increase if the arrangement is successful.

The financial crisis has changed family offices' attitude to their investments in general, with real estate benefiting from this, says Yelverton. "There is a clear trend towards more transparency for family office investors as a result of the crisis - this has resulted in a move away from complex structured products and has benefited direct private equity and real estate investing. The real estate story will remain compelling as families look to buy into the real economy and get away from products."

For some the crisis appears to have been an opportunity. Those families with access to liquidity were able to invest in trophy properties when values plummeted.

"You have seen a lot of family offices acquire trophy buildings in good locations," says Gabert. "For the bolder family offices it was a good way to spend their liquidity because with this asset you have good downside protection that offers a good yield. When everything was collapsing they thought: I can buy the building at a record high yield in London, or in Paris. It's a good building that will be there forever."