Private bank uses strength of HSBC brand to secure exclusive deals for clubs of wealthy clients
“All our ultra high net worth clients will have significant real estate exposure,” says Paul Forshaw, head of real estate fund management at HSBC Alternative Investments, part of HSBC Private Bank. “The clients like the fact that it is an inflationary hedge, has a lot of fundamentals going for it and yes, it is a fairly illiquid investment, but it is an essential part of a high net worth portfolio.” HSBC Private Bank’s ultra high net worth investors are those with at least $10m and the bank offers two products tailored to appeal to them.
The first of these are its real estate clubs. “We identify key buildings in global locations, secure exclusivity on those and put together small clubs or syndicates to come into them,” says Forshaw. “It’s probably the main focus of our business at the moment.” Typically, the minimum investment for real estate clubs will be $5m. HSBC’s club programme restarted in December 2009, when it paid $203.4m for a 90% stake in 1625 Eye Street, an office building in Washington, DC. “At the time there was some surprise and pushback from people, because we were very early,” says Forshaw. “But it’s been very successful, so the momentum has built.”
Since then, HSBC has bought another building on Eye Street and spent $255m for a 49% stake in 1540 Broadway in midtown Manhattan. “They are illiquid products. They will have a business plan attached to them, which will have typically a five to seven-year holding period. Investors are locked in– they need to be ultra high net worth investors to know they can lock that money away for that period.”
HSBC offers a second investment product for its very topmost clients – “those who have very, very big relationships with the investment bank, the corporate bank and the private bank”, in the form of segregated mandates. “Sophisticated investors, ultra wealthy ones especially, will look to build diversified portfolios themselves, but want to have control of assets,” says Forshaw. “They like o exit when they want. They will allocate a certain amount of equity to us on day one and we will build them a diversified portfolio. This gives them exactly what they want. They have complete control over that portfolio – we’ll advise them, but they have the ultimate say over what they do.”
On the club deals, clients do not have that control. “But they do have a share in a very recognisable piece of direct real estate,” adds Forshaw. “This allows them to access products they wouldn’t be able to buy themselves because they are normally of a very significant size and require a lot of complex tax structuring.”
Striking exclusive deals
The trick is to get exclusive, off-market deals using HSBC’s brand to talk directly to owners. “The way we have succeeded so far is to identify the cities we want to be in, the streets where we’d like to own assets, then the building we’d like to own, find out who owns it and try to unlock it,” says Forshaw. The bank works through local partners; in the US, for example, it has teamed up with Edge Funds. The partners have an exclusive relationship with HSBC and co-invest in the deals. HSBC Alternative Investments cannot invest in the clubs for regulatory reasons, but uses incentives to align its interests with those of investors.
HSBC’s clubs are targeting the US and London. “Asia will be a focus next year,” according to Forshaw. “Asian markets, particularly Hong Kong and Singapore, are pretty hot at the moment, so possibly it is not the time to be doing club deals.” Continental Europe isn’t yet on the radar. For now, HSBC concentrates on fairly dry investments. “We had a once-in-a-generation buying opportunity, because we had access to equity,” says Forshaw. “That allowed us to access some very, very prime real estate at prices we wouldn’t have been able to get before.
“We’ve been able to buy at a discount. The returns we’ve been able to show are above dry – 15% or 16% internal rates of return with very limited downside risk.” But as dry investments get more expensive and the club programme builds up, HSBC will look for value-added, more management- intensive assets. Eventually, developments may be on the cards. “As time goes on we will identify the investors who are prepared to take opportunistic risk,” says Forshaw.
Segregated mandates and clubs are for the seriously rich. For run-of-the-mill millionaires, HSBC has a global fund of funds and an Asian one that co-invests with Mapletree, and is majoring on China. The bank stepped away from real estate funds when the financial crisis put investors off these vehicles, but clients are regaining their appetite for property. “There will be a time to look at funds again,” says Forshaw. “But there’s no point in putting out another bland fund, enticing people in and not getting the returns we want. We’re exploring some ideas for new funds both here and internationally.” HSBC is likely to launch its first post-crisis fund within the next six months, he says. “Funds will appeal more to investors who can invest a minimum of $250,000 and we are very conscious of the need to service that sector of the client base.”