Over the last few years, right up until the pandemic, many family offices around the world were investing in real estate assets due to their long-term cash flow potential. For example, The Real Deal’s 2020 study highlighted that the percentage of real estate investments made by American family offices went up from 12% in 2015 to 20% in 2020.
However, the pandemic sent the entire real estate market into pandemonium with both residential and commercial properties crashing in value. The volatility of the markets also coerced many family offices to shift their wealth generation strategies from long-term to short-term solutions, thereby shifting away from real estate assets. Now, as we emerge from the pandemic and with the global real estate market showing positive signs of recovery, it might be worth revisiting what makes it such a lucrative market to invest in and some of the ways to maximise profit in the same.
Benefits of investing in real estate
One of the key objectives of most family offices is long-term wealth generation. The tangible nature of real estate investments and the high probability of their appreciation automatically classify them as safe assets for investment. Here are some additional benefits real estate investments bring to the table:
- A steady stream of cash flow owing to their long-term, stable nature of growth.
- Being tangible assets, they provide direct control over the investment.
- Provides numerous tax benefits if and when executed correctly. For example, the United States government allows for several tax write-offs towards expenses that are tied directly to the management of the property.
Real estate investment strategies
Although real estate assets are considered safe, their returns can be maximised if set strategies are followed according to the goals and objectives of the family office. Primarily, real estate investments can be classified into 4 kinds:
- Real Estate Investment Trusts (REITs) – REITs are companies that own and hold several pieces of income-generating real estate like hotels, malls, etc. These companies may or may not be publicly traded and as of 2020, REITs owned approximately $4.5 trillion worth of real estate assets in the US. Investors, including family offices, can buy stakes into REITs through mutual or exchange-traded funds (ETFs), or the purchase of individual company stocks. The key upside to investing in REITs is that it allows family offices to tap into the lucrative commercial real estate market indirectly without the operational hassles associated with actually owning the property.
- Real Estate Hedge Funds – Although hedge funds typically invest in riskier asset classes, in recent years, some have heavily favoured the more stable real estate market. Real estate hedge funds like Angelo, Gordon & Co., Cliffwood Partners LLC, etc, typically invest heavily into publicly-traded REITs and underperforming commercial real estates as liquid assets.
- Crowdfunding Options – These platforms allow investors to directly fund and buy stakes in large real estate projects. Unlike REITs, crowdfunding has a much lower minimum investment criteria that can go as low as $500-1000. However, most crowdfunding groups are only open to accredited investors that have a minimum net worth or annual income. Crowdfunding typically has more associated risks and these investments also tend to be highly illiquid. Leading crowdfunding platforms include CrowdStreet, Fundrise, and DiversityFund.
- Direct Investment – Indirect investment options like REITs and hedge funds are highly illiquid which is often undesirable for long-term wealth creation. Therefore, FOs that prefer having complete control over their investments should opt for directly owning and managing their real estate assets. These assets could either be residential or commercial properties. The former is not only easier to value but is also simpler to manage. However, commercial properties can generate much higher returns based on their income-generating capabilities and cap rate.
Examples of family offices investing in real estate
Real estate continues to be the market of choice for family offices. These are three notable examples:
- Propst Family Office, Alabama – The Propst family founded Propst Companies to specifically diversify the family’s portfolio into real estate. The family office focuses largely on direct investments in real estate and private equity. It also boasts in-house real estate services and development companies. The family office’s portfolio includes a 1.2 million square feet “Broadwest” business park in Nashville, over 700 single-family homes as a joint venture with Signature Homes, and the 88 thousand square foot office building “BB&T” in Huntsville.
- Hackman Capital Partners, California – This California-based wealth management firm is the family office of the real estate mogul Michael Hackman and his family. It invests primarily in commercial real estate assets through direct investments along with the MBS Group. Their portfolio largely comprises media-use properties like sound stages and studios across the US, the UK, and Ireland. The 182 thousand square feet Sony Pictures Animation Campus in Culver City, the 780 thousand square feet Television City in Los Angeles, and the 1.6 million square feet Midlink business park in Kalamazoo are some of their largest holdings.
- Seaview Capital, California – The family office of the career techpreneur Joseph Fryzer, Seaview Capital focuses on direct investments into multi-family properties and upscale single-family rentals in Greater LA, Phoenix, and Boston, and has over $500 million in assets under management.