Family offices turn attention towards alternative investments
Investors continue to be active in prime locations in key gateway cities, with office, living, and hospitality sectors gaining favour
FAMILY offices in the Asia-Pacific have been in the spotlight in recent years.
Singapore and Hong Kong, the regional wealth management hubs in Asia, have rolled out various incentives and schemes over the last five years to attract the largest family offices to their shores.
This has not gone unnoticed, with the region now home to 9 per cent of the world’s family offices – of which 59 per cent are in Singapore, based on the recent 2023 Global Family Office Compensation Benchmark Report by KPMG.
This growth is being driven by a number of factors, including rising wealth levels in the region, the increasing complexity of navigating financial markets, and the desire for families to have more control over investment strategies.
The need to professionalise the management of their assets has become more pressing amid increasing global uncertainty and geopolitical risks.
The tumultuous macroeconomic environment has prompted family offices across the globe to review their investment strategies, especially in the face of higher cost of capital and differentiated returns from non-traditional asset classes.
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Increasingly, family offices are turning their attention towards alternative investments such as private equity, venture capital and real estate.
These offer the potential for higher non-correlated returns, diversification benefits and the opportunity to explore new growth markets.
At the same time, the focus on impact investing and sustainability continues to grow.
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Family offices have generally adopted a conservative investment approach, often preferring the transparency and familiarity of traditional assets like equities and bonds.
However, the investment landscape has evolved through the years and information has become much more accessible in this digital age. Family offices are now looking to diversify their portfolios and spread risk across different asset classes to protect their wealth.
Alternative investments provide this diversification by offering returns that are not closely correlated with the stock market’s fluctuations. This can act as a hedge against market volatility, enhancing the resilience of family office portfolios.
Among alternative investments, real estate is emerging as a significant focus. More than half (52 per cent) of family offices in Asia-Pacific are looking to increase their exposure to real estate. The allure lies in the tangible nature of property assets and their potential for steady rental income and long-term capital appreciation.
However, the considerations for real estate investment as part of a family office portfolio are shifting.
Post the Global Financial Crisis, where major central banks across the world followed the US Federal Reserve in slashing interest rates to historical lows, investors typically favoured core best-in-class assets with exceptional qualities which offered a decent pickup compared to cash returns.
With inflation now rearing its ugly head, the cost of debt has risen at a rapid pace to multi-decade highs, and this has led family offices to move down the risk curve to pursue value-add and opportunistic strategies.
These may involve investing in distressed assets – properties that are in foreclosure or owned by the lender – or buildings that require some level of enhancement or redevelopment to maximise returns. The pricing and yield of such real estate types justify the higher cost of debt in various countries.
Location is non-negotiable. Family office investors continue to be active in prime locations in key gateway cities such as Singapore, Sydney and Tokyo, where good quality real estate assets are considered “irreplaceable”.
Sectors such as office, living, and hospitality are gaining favour among family offices. While the office sector has been facing a multitude of headwinds in the face of changing tenant dynamics in a post Covid-19 world, family offices with a longer-term investment horizon are capitalising on the opportunity to acquire such assets at more attractive prices. This approach aligns well with the “patient capital” nature of family offices which have the ability to ride through market cycles, and take a generational approach towards investments.
Investing for impact and sustainability
Beyond financial returns, family offices in Asia-Pacific now have a greater awareness of the need to address social and environmental challenges and the potential for impact investments to generate meaningful returns. As such, Environmental, Social, and Governance (ESG) considerations have become integral to their overall investment strategy.
In the context of real estate, tenant requirements are playing a significant role in driving ESG strategies. Research from JLL shows that one in three corporate real estate leaders in Asia plan to exit less carbon efficient spaces by 2025, and sustainability is now among their top three leasing criteria.
As tenants increasingly demand sustainable and socially responsible spaces, landlords, especially private investors, need to adjust their approach and incorporate ESG considerations into their underwriting processes.
Family offices also recognise the importance of aligning investments with their corporate values and managing reputational risks.
In Singapore, family offices have started to contribute to Singapore’s drive towards net zero by working with the Monetary Authority of Singapore, the Economic Development Board and other local organisations to channel their wealth towards climate-related investments or collaborative giving models.
Timeless appeal of tangible assets
Amid shifting economic tides, family offices in the Asia-Pacific and in Singapore are undergoing a profound transformation. Beyond global economic complexities, intergenerational shifts are reshaping these offices’ approaches to wealth management.
As the mantle passes to younger successors, a nuanced fusion of tradition and contemporary perspectives takes centre stage, with the younger generation leaning towards progressive strategies such as private debt and digital assets.
However, the timelessness of real estate persists. Its tangible nature offers a link between the conventional and the modern, appealing to the emotive aspects of private wealth investors seeking stability and growth.
This coexistence of new and traditional perspectives paves the way for a diversified and balanced investment strategy, focused on alternative investments to insulate themselves from the challenging conditions in public markets.
Khoo Kian-Jin is head of private wealth, capital markets, Asia-Pacific at JLL
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