By Tamas Mark, Global Head of Real Assets, and Alex Dean, Head of Family Office, Europe and Middle East
The world’s richest families are poised to increase their exposure to real estate as borrowing costs are expected to come down while the commercial sector recovers from a COVID-led reconfiguration.
As capital market conditions improve, transactions are set to increase in the sector in the coming months. The biggest sectoral beneficiaries are likely residential, healthcare and education projects, an investor attitude survey by real estate consultants Knight Frank found.
Any pickup in deals would be welcome news in a sector that has struggled since pandemic era lockdowns forced people to stay home while leaving offices and other commercial facilities empty. That legacy left many property investors grappling with lower revenue flows as rapidly hiked interest rates caused debt servicing costs to soar.
The impacts were felt across private market strategies with closed-end real estate funds posting an average negative return in 2023, the first annual loss since the financial crisis, according to McKinsey & Co. Moreover, redemptions from open-ended real estate funds were last year at their highest in at least two decades as capital was pulled from core and core-plus strategies, the consultancy said.
All eyes are now on transaction volumes as central banks finally begin to cut interest rates. To date, Canada, the European Central Bank, Sweden and Switzerland are among developed economies where rates have been reduced this year. The U.S. Federal Reserve is now expected to cut rates near the year-end while the UK and other central banks are also expected to soften their position as falling inflation nears policy target levels.
Investors have prepped a war chest
Since the pandemic, investors have been holding back as they wait for opportunities to emerge, especially from distressed sellers struggling with crippling debt loads. Data from Preqin shows the amount of dry powder held by closed-end real estate fund managers has averaged just over $400 billion since 2020 even as annual fund-raising amounts plummeted by a third in the post-COVID years. This indicates that managers have slowed the pace of capital deployment and kept more powder in reserve, evidenced by a year-on-year 46% drop in global commercial real estate investment deal flow in 2023 to US$698 billion, according to the Knight Frank report.
Dry powder data from the fund industry only gives a snapshot of UHNWI intentions however, as the majority prefer to invest into real estate directly. Wealthy families allocated 10% of their wealth to real estate last year and anticipate raising that to 12% in 2024, according to a global family office report from Swiss bank UBS. Based on client preferences, more than half of this allocation will likely be through direct property purchases, with a further 19% invested in closed-end real estate funds, the bank found.
Supporting these purchases will be a steady increase in ultra-high-net-worth (UHNW) investors. There were more than 626,000 such investors last year and that number is growing by about 70 a day, with a fifth of them planning to buy residential property this year, and a similar number expecting to invest in commercial projects, according to Knight Frank. The biggest increases in UHNWI wealth were in North America and the Middle East, said the advisory firm, who set a threshold of US$30 million net worth to qualify.
Such investors prefer traditional sectors such as retail, hotels and offices, and while wealthy families are looking at specialist areas like healthcare and student housing, the operational and regulatory expertise needed to run these businesses will be a barrier to some family offices, Knight Frank analysts noted. Certainly, there are headline deals around that favor opportunistic family office buyers. Earlier this year, Canary Wharf’s Five Churchill Place in London was up for grabs at a 60% discount to the seller’s original purchase price. While the sale was eventually shelved, similar discounts have been reported elsewhere in London and also in New York and other major commercial property markets.
Real estate opportunities are changing
Stepping back, the pandemic left long-lasting structural changes in how people use real estate. Hybrid and work-from-home employment models have reduced the amount of office space companies need. A greater reliance on home shopping and food delivery has changed how people use retail. Then there is the advent of new technologies, like artificial intelligence, that require huge yet-to-be-built data storage warehouse capacity, life sciences laboratories, as well as an aging demographic, particularly in Europe, that requires different kinds of housing stock and elderly support services.
Further dynamics include the focus on greener energy efficient buildings, especially in the commercial sector, and the location or relocation of property to areas considered low risk in a changing climate. An example would be locating high value manufacturing sites away from coastal areas affected by tidal surges.
All this provides fresh opportunities for UHNWI who’re typically less leveraged than institutional or commercial investors and can be especially nimble negotiating a property market that’s desperate for fresh capital.
About the authors
Tamas Mark is Global Head of Real Assets at IQ-EQ, based in Luxembourg. With over 20 years’ experience in the industry, Tamas has extensive knowledge of managing complex real estate structures holding assets across many property sectors.
Alex Dean is IQ-EQ’s Head of Family Office for Europe and the Middle East, based in London. He’s an experienced industry professional with a demonstrated history of working in the investment management and private wealth industry. Alex has specialist knowledge in investment management, banking, trust and estate management.
