Property debt investment helps boost family coffers

Good income prospects attract family offices to real estate debt, writes Lauren Parr

Designed to preserve wealth, family offices are notoriously hard to get information on. But their love of direct property is well known, and now, says the founder of one oil wealth-backed lending business, their real estate debt allocations are also growing.

“Family offices generally look at real estate debt as an asset class in its own right,” he says. “Real estate debt allocations have grown among family offices and the larger private banking groups that service them. This is coming through fund allocations, managed accounts, syndications, or, for some larger family offices, directly.”

A London-based real estate hedge fund manager adds: “For some time there’s been more demand for property debt from family offices.” Since 2011, such investors have contributed around 15% of the capital in its 2009-launched real estate debt fund.

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Basil Demeroutris, FORE

“Families are attracted to real estate debt’s income generation; it’s a big part of why families invest in real estate generally,” says Basil Demeroutis, managing partner of FORE Partnership, a pan-European real estate investment club for family offices and private investors. “With interest rates at zero in half of Europe’s countries, a 6-7% cash pay coupon on real estate debt is attractive.”

Doug Weill, co-founder of capital raising expert Hodes Weill & Associates, says debt is a great way to access real estate from a risk-return standpoint. “It’s seen as a good alternative to returns on core assets, as some investors are concerned that core property pricing is nearing a peak. By investing in the debt instead, investors give up the upside but are protected on any downside,” he says.

Family offices can also use real estate debt as a pseudo private equity investment, i.e. providing working capital to help build a lending business. The founder notes: “This only works for seed or cornerstone strategy investors.” For example, debt fund manager Renshaw Bay received seed capital from Rothschild to help set up the business.

The founder says: “Interest in real estate debt stems from lending market dislocation. It interests well-capitalised family offices to support direct lending businesses and to benefit from some markets’ risks/returns.”

Chris Holmes, JLL
Chris Holmes, JLL

Chris Holmes, Jones Lang LaSalle’s head of UK and European debt, adds: “People like the Safra family put money out in terms of bilateral lending, discreetly. These are off-
market situations; it’s about knowing people that need money. The goal is high yields, not necessarily by lending at higher leverage but, for example, lending on developments. High-
net-worth families aren’t looking to lend at Libor plus 200; more like 500-600bps. ”

Some family offices invest in debt because the opportunity to buy the asset didn’t appear, or they came second in the bidding. “It mirrors what they are trying to do in direct property; if they would buy it, they will lend on it,” says Holmes.

However, Demeroutis is sceptical that family offices will become a bigger part of the market, as “there is already a huge amount of capital pointing at the space and the funding gap is rapidly closing, hence potential returns are falling”.

Keeping residential lending in the family

Residential property is at the heart of family offices’ real estate debt investment, as there is greater understanding of these assets. “Some family offices have provided small residential bridge loans, where the developer doesn’t have permanent bank financing but needs to move quickly,” says FORE Partnership managing partner Basil Demeroutis .

Groups like Topland, owned by billionaire brothers Eddie and Sol Zakay, and the William Pears family (through Capital A Finance), have provided debt for bigger residential projects. Capital A’s deals include mezzanine finance for Ronson Capital Partners’ London Riverwalk scheme on Millbank, Westminster.

Venn Finance, partly owned by a large Norwegian family office, has provided mainly UK mezzanine and development finance, but has launched a Dutch residential mortgage arm.

Private wealth capital has also been seen in mezzanine positions in Germany. Alternative lender Tyndaris last year closed a €64m, four-year mezzanine loan secured against three German offices.