After nearly 18 months of largely standing on the side lines, family offices are eager to deploy capital in real estate markets across the UK, but remain selective in their investments.
Over the past 18 months, family offices pulled back on opportunistic investment while observing the impact of the pandemic on real estate. That pent-up demand to deploy capital is now being released and they are searching for the right real estate opportunities. This presents a prime opportunity for property companies and developers that want to raise new equity or who have outgrown their existing equity partners.
Family offices’ preference for diverse strategies continues. Like many savvy investors, they are quick to spot market trends and their most popular sectors are industrial and the old favourite, residential, particularly BTR.
Industrial and logistics developments are hard to come by in this competitive market and those that do stack up garner significant interest from family office capital.
The office sector also presents opportunities; the pandemic has accelerated the shift to smaller, repositioned assets. Offices that are well-located, offer flexible leases and have fit-out costs borne by the landlord are regarded as most attractive. With the sector near the bottom of the cycle, this is potentially a lucrative time for investors to commit capital.
Although retail remains an uncertain sector, they are also gravitating towards unloved assets, often those identified as key to high-street regeneration strategies.
Family offices have a preference for diverse strategies and are quick to spot market trends
The challenge for developers seeking this type of private capital is investors’ privacy. Family offices remain the least approached source of capital, behind better-known private equity firms and real estate fund managers.
There is also the misconception that family offices are slow and cumbersome to work with. Much of this is anecdotal, although the title ‘private investor’ is appropriate here. Family offices will not promote themselves or their projects; they choose to invest under the radar.
But the reality is that they are ambitious, and with family members often in the room, can be quick and decisive to act. They like an element of risk, but will want to know the downside and that the base-case business plan will yield a reasonable return.
They can also be more generous with profit-sharing arrangements as they don’t need to hit an internal rate of return, unlike a private equity fund, which must satisfy a minimum return to its investors. Family offices can be flexible, price their equity accordingly and efficiently implement structures that ensure all parties are aligned.
The benefit of engaging a family office is that often there is no unwieldy or opaque investment committee process to wade through. But that does not mean the level of due diligence is any less rigorous and potential sponsors will need to pass muster.
The right projects must have significant upside, possibly from planning adjustments, while maintaining a tangible base-case business plan. The sponsor must have a good track record; the project must show good upside; and it is best to keep the joint venture simple, as family offices do not enjoy complicated arrangements. But in return, they can move quickly and will prove to be a valuable and strategic equity partner for any property company with aspirations of growth.
David Cunnington is managing director of Charles Irvine