January 2019

Invest ing St rat egies

Real Est at e Debt Invest ing


AsMarket DynamicsareChanging,Real EstateDebt is Cont inuing to At t ract MoreAt tent ion to Family Offices

By Joseph I acono & Kim Diamond - Crescit Capital Strategies

arket indicators and history suggest that the decade-long run of rising real estate values, development demand and overall employment and economic M Publisher Insight : AsReal Estatebecomesmoreandmoreof an important part of a familyofficesportfolioallocation, investing into real estatedebt issomething I haveseengain tractionwith familyofficesover the last fewyearsasa way tocaptureyield. Thisallocation focuscontinuestohappen for familyofficesandwithgood reason.

59% of the family office portfolio, is favored over residential, which accounts for the remaining 41%. Real estate?s low correlation with public equity makes the sector suitable for family offices seeking to diversify portfolios of stocks, bonds and other alternative investments. In addition, real estate is a good inflation hedge and it is propelled by demand drivers that are separate from the standard business cycle. Recent results add to the attraction of real estate, as the asset class performed well in 2017, generating attractive global returns averaging 12%. Despite this year ?s increase in capital commitments, the enthusiasm for real estate as an asset class for family offices has been tempered by concerns over pricing and liquidity. Increased capital flows have resulted in commercial property price appreciation and significant cap rate compression. While CRE fundamentals are generally healthy, interest rates are rising, yields are being squeezed and CRE prices are leveling off or even beginning to fall in some markets indicating that commercial real estate values are likely approaching the peak. Given current cap rates, investors are increasingly wary of investing in real estate equity.

growth will return to the mean. For family office investors, these changing market conditions combined with a retrenchment of traditional capital sources have led to increased interest in real estate debt. Whether through direct lending to borrowers or investing with the growing number of debt-focused funds and alternative lenders, real estate debt offers family offices favorable risk-adjusted returns and will likely continue to grow in importance for portfolios in coming years. According to the Campden Wealth and UBS2018 Global Family Office Report, after a 0.7% decline in allocations in 2017, family offices have increased their exposure to real estate direct investments by 2.3% this year. As a result, in 2018 real estate accounts for an average of 17% of all family office investments and continues to be the third largest asset class component of family office portfolios after equities and private equity. For most family offices, real estate investments are split between residential and commercial holdings; however, the report confirms that commercial real estate (CRE), which comprises

45 Est at e Magazine I The Fam ily Office Real January 2019


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