Family offices have been around for a while – literally, generations – but over the last decade or so have emerged as the go-to source of capital especially in private market deals, not just in real estate. Growing in both sophistication and size, in many ways family offices are the new hedge funds, replacing the influence hedge funds had in the 1990s and early 2000s.
It is estimated that there are some 3,000 formalized family offices in the US alone, perhaps 6,000 globally, and the combined wealth of ultra-high-net-worth investors worldwide stands at more than $30 trillion. That's almost as much as the GDP of the US and European Union combined. And, in terms of real estate specifically, in Europe private investors accounted for some 10 percent of commercial property deal volume last year. In short, their influence is big and growing.
Why are US family offices looking toward Europe? Well, the macroeconomic recovery in the US, which has been firmly underway since 2011 and 2012, combined with a dollop of American optimism, has led to domestic US property prices rebounding sharply to the point where valuations are broadly at pre-crisis levels or higher across many markets and strategies.
European valuations remain in the early innings of the cycle, with some notable exceptions. US investors in particular have woken up to the fact that Europe is not falling into the Atlantic any time soon (even if pushed in that direction by an increasingly inevitable Grexit). And with the Euro now 20 percent cheaper than it was this time last year and the ECB having its foot firmly on the QE accelerator, on a relative value basis, European real estate is looking cheap to dollar investors.
More generally, there is a stereotypical view that wealthy families like core real estate, providing secure, inflation-protected income streams above all else. But scanning recent transactions and, indeed, considering longer-term trends, private investors look to have a much more disjointed and incoherent approach to property investing – core offices in gateway cities like London and Munich, retail assets in secondary Spanish and Italian markets, hotels, hostels, student housing, nursing homes, high-end houses. From development deals to investment assets, a smorgasbord of strategies is on the agenda – and often from the same investor.
What sense to make of all this running from pillar to post? I believe it comes down to the fundamental answer as to why private investors invest in real estate in the first place.
Private investors are, perhaps by definition, value investors. Yes, real estate holds some qualities as a long-term store of wealth which explains the attraction to core assets. But they also quite simply are drawn to good deals. There is some logic in this of course: the wealthy did not become rich by overpaying for things. And so the picture becomes clearer by looking at the diverse strategies through the lens of a value investor. Hence the attraction to Europe.
But beyond this common thread and the somewhat similar deep-value qualities, there is a more philosophical correlation. Without being too theatrical, it is a basic human desire to connect with the world around us. Private investors are rather more sensitive to this condition than faceless institutional investors. It is a behavioral finance-driven phenomenon as much as anything.
There is something fundamentally more appealing about investing in an asset that you can see and touch versus, say, a generic stock or bond. And within the real estate asset class, properties that resonate are all the better. Investors we know who cannot tell you much about their latest emerging markets manager, suddenly light up when you talk about the shopping mall they just invested in and are able to recount all the key facts and figures. It is this passion that often drives their investment decisions.
So what do family offices want? Quite simply, good deals, and deals that they can identify with. While we can offer are no strict formula or list of investment criteria if you were hoping to mimic the billionaire around the corner, in our increasingly complicated investing environment there is a surprisingly simple set of guiding principles that have helped make family offices the next big thing.