Wealthy investors pile into US property says European MFO
The Stonehage Group, a London-based European multi family office (MFO), says ultra high net worth clients are piling into US property as returns in certain sectors have reached highs of 40% over the past year.
Stonehage says behind equities and fixed income, US real estate currently forms the largest proportion of a typical ultra-wealthy family’s portfolio. It now accounts for between 8-10% of a typical client’s portfolio, where historically, allocations to US real estate would have been close to zero.
In many cases clients’ exposure is now almost double that allocated to other alternative investments, such as gold or commodities, where typically no more than 4% of a client’s portfolio is invested in these assets.
Stonehage explains that property prices in some regions of the US have fallen by 50% since the end of 2007, but that prices have now stabilised and, in some locations, have begun to rise. In these areas the oversupply of housing stock has cleared, and inventory levels are beginning to lag demand, pushing up prices.
The MFO says few investors have direct exposure to US real estate because in most cases the tax implications are too onerous, but most clients are invested via the debt markets, specifically mortgage-backed securities.
John Veale, chief investment officer at Stonehage Investment Partners, said: “The US housing market suffered after the crash of 2008, as many banks and other lenders shed real estate assets. This created excess supply, and it took until early 2012 for inventory levels in many US regions to return to pre-crisis levels. We saw this as an ideal time for clients to invest.”
“The fund manager we selected for the first client allocation generated a 40% return last year from residential mortgage backed securities. The second allocation later in the year is still in the process of deploying capital, but our return expectations are an annualised 10-12% over the life of the vehicle. We expect to generate returns from both capital appreciation and ongoing yield.”
He continues: “For our most recent allocation, the investments are mainly concentrated in what we would term Tier Two areas. For example, the second of the funds we chose to work with has invested in commercial buildings in Las Vegas and Illinois as well as buying a portfolio of residential mortgages from a regional US bank.”
Kirsten Boldarin, director at Stonehage Investment Partners said returns in this sector have been far higher than expected, as a result of timely investments in a market that has turned on its head in the last year.
“We are constantly looking for opportunities like this for our clients and believe they benefit most from long-term investments that provide strong, consistent returns. We expect our allocations to US real estate will produce this type of return stream.”
Stonehage says it is still identifying plenty of opportunity in the US real estate market, and is looking for partnerships with fund managers.