Blackstone executive vice chairman Tony James’ family office is eyeing its entry into real estate.
Jefferson River Capital, the family office investing on behalf of James, has recently hired a head of real estate, according to media reports. Though James has previously invested in real estate through a different family office, Jefferson River has not made any allocations to the asset class yet. The firm reportedly plans on focusing investments on multifamily, industrial and office properties within the US.
Jefferson River is far from the only family office that is seeking to expand into real estate, however. Here are four reasons why some family offices are looking to invest in the asset class for the first time:
1. Strong returns
In the “Global Family Office Report 2017” by UBS and Campden Wealth, 40 percent of family office survey respondents indicated a desire to increase allocations to real estate, while 45 percent said they plan to maintain their current allocations to the asset class. Because the results include both current and prospective investors, Campden Wealth director of research Rebecca Gooch believes new investment should increase and new investors will enter real estate over the coming year.
Strong returns in asset classes, including in real estate, may be encouraging existing family office real estate investors to increase allocations and new investors to enter the space, Gooch added. Vintage funds from 2008 to 2015 have recorded double-digit pooled internal rates of return, although returns for 2016-vintage funds – the most recent year available – moderated somewhat to 7.8 percent, according to a March 2018 “Real Estate Index and Selected Benchmark Statistics” report by Cambridge Associates.
2. Newly formed family offices
EY real estate principal Mike Magrans said the uptick in family offices seeking to invest in real estate for the first time is being driven in part by newly formed family offices. “We are seeing a number of new entrants from the tech sector, I’ll tell you that,” he told PERE, adding that those who made their wealth from social media and technology companies are now looking to diversify their investments into real estate.
3. Influence from other family offices
FINTRX founder and chief executive Russ D’Argento notes that 73 percent of the family offices covered in the FINTRX database today invest in real estate, compared to 61 percent a year ago. In support of the increased investment activity, larger family offices have been making more dedicated real estate hires over the last two years.
D’Argento has also noticed that more family offices are investing in real estate for the first time because of influence from other family offices. Smaller and mid-sized family offices may be migrating toward the asset class after seeing larger peers – offices with more than $1 billion in assets under management – allocate more capital there. Though he says the data isn’t enough in its current state to share, it’s a trend that he’s seen, and he expects the data to strongly support it over time.
4. Tax Cuts and Jobs Act
The 2017 Tax Cuts and Jobs Act is also expected to drive more real estate investment activity from family offices, according to EY Americas family office leader and partner Bobby Stover. Under the new bill, investors can receive tax breaks by making real estate investments in economically distressed communities called opportunity zones.
“There’s been a tremendous amount of interest from family offices around the benefits and use of opportunity zones,” Stover said.