The trend of private wealth becoming more active in investing in commercial real estate is set to continue in 2023 as institutional investors become more cautious amid market uncertainty, according to data from MSCI and Knight Frank.
The proportion of private wealth capital in total commercial real estate transactions increased from 28 percent in 2020 to 38 percent in 2022, according to MSCI data as of April 2023. The data showed the investor type continued to be active in the first quarter of 2023, when it made up 34 percent of the total transaction volume.
Hong Kong family office Chow Tai Fook Enterprises’ partnership with Carlyle China spinout Ascent Real Estate Investors, which PERE exclusively reported on this week, is the latest example of a private wealth investor wanting to expand its real estate investment capability.
While both CTFE and the Ascent team are responsible for investment and asset management activities, the former will provide seed capital for future funds and platforms launched under the partnership.
Han Chen, founder of Ascent Real Estate Investors, said the Hong Kong investor has a long history of real estate investing and is more flexible than institutional investors with making investment decisions and deploying capital.
This greater flexibility has helped private wealth capital to remain active in real estate investing while many institutional investors have remained on the sidelines. “They can often purchase an asset all-equity as they have a high cash reserve,” explained Neil Brookes, global head of capital markets at Knight Frank. “Once they have purchased the asset, they can look to raise debt later when the debt market stabilizes and the cost of capital reduces again.”
Brookes told PERE that private wealth capital will become more active in 2023 as opportunities emerge from owners that are forced into selling their real estate assets because of mounting refinancing pressures this year.
“We have observed that some private clients are leveraging the absence of institutional capital to acquire assets that are usually beyond their reach,” Brookes said. He pointed out that private wealth’s share of global commercial real estate investment in 2022 was its highest on record. While institutions reduced real estate investment by 28 percent in 2022, private wealth was less defensive, with transaction volume from the investor type falling by only 8 percent last year, according to Knight Frank’s Wealth Report 2023.
Nick Loup, chief executive officer at Hong Kong-headquartered real estate investment firm Chelsfield Asia, also pointed out that the size of the private wealth market, including family offices and high-net-worth individuals, has grown globally due to significant wealth creation in recent years and this has in turn increased these investors’ allocations to commercial real estate. Setting aside exchange rate movements, aggregate global wealth grew by 12.7 percent in 2021, according to Credit Suisse Research Institute’s thirteenth Global Wealth Report published in September 2022.
Brookes also expected an uptick in activity particularly from Asia-Pacific as 32 percent of high-net-worth individuals in the region plan to increase their investments in commercial real estate in the next 12 months. “I think because we have seen this good wealth preservation in Asia-Pacific as well as more high-net-worth individuals still being created in the region compared to the US and Europe,” he explained.
Indeed, while the US accounted for the largest source of private wealth capital last year, with $302 billion invested in private real estate, the investment volume from the region dropped 3 percent year-on-year, according to the Knight Frank report. Of the top 10 sources of private wealth capital last year, investors from France and China were the only buyers to increase investment in 2022, up 27 percent and 25 percent on the previous year, respectively.
In terms of sectors, Brookes told PERE that private wealth investors continued to favor the office sector because office assets are less management-intensive than assets in some other sectors. According to the report, more than 40 percent of total private wealth cross-border capital prefers the office sector, followed by the industrial and residential sectors.
It is also worth noting that private wealth investors are now more likely to gain access to good office assets as many institutional investors pull back due to the high cost of borrowing for office transactions today, according to Brookes. For example, the average cost of debt for office specialist funds in Australia more than doubled in Q4 2022, increasing from 2.7 percent a year ago to 5.8 percent, the highest average cost since mid-2019, according to MSCI.
“As the cost of debt is higher than the yield institutional investors can get from purchasing offices, they have to negatively gear their investment which is dilutive to their returns,” said Brookes.
With growing interest from private wealth capital, Knight Frank has participated in a number of office deals involving the investor type in the past six months. The firm took part in the acquisition by Hancock Prospecting – the mining and agricultural company owned by Australian tycoon Gina Rinehart – of 70 Eagle Street in Brisbane for more than A$100 million ($67 million; $61 million) and UBS’s A$400 million purchase of a 73 Miller Street office block in Sydney on behalf of a wealthy European client.