Having the proper framework is critical to benefit from the current repricing.

Single-family offices are a heterogeneous group of investors and differ in various categories; in particular their size or the targets for generating the target returns. What they have in common is not only that a team of professional investment specialists manage the principal’s or family’s assets, but also that they typically have the luxury of a longer-term investment horizon.

We have observed, though, that the management of real estate is not as consistently handled as the management of liquid asset classes or private assets. Some family offices do not even see real estate as part of the financial wealth but consider it outside the traditional asset allocation. Others prefer Private Debt and Private Equity but omit real estate assets from their private market allocations. There are also family offices that prefer individual direct deals because the process of acquiring and selling real estate is, in part, one of the hobbies of the principals. However, this does not lead to a diversified real estate portfolio but rather an irrational selection of collector’s properties.

By looking at real estate in a piecemeal fashion, investors miss out on significant benefits of real estate in multi-asset class portfolios. In a diversified real estate portfolio, investors could earn a decent risk premium over time at relatively low volatility. Due to their low correlation to equities and bonds, diversified real estate portfolios yield far-reaching diversification gains. However, the emphasis should be placed on diversified real estate portfolios. Focusing on individual deals can sometimes result in unacceptably high idiosyncratic risks. For instance, an investor with an office asset that is excessively large relative to their total wealth, financed at a high loan-to-value ratio, could potentially lose all of their equity in such a deal. This situation could have catastrophic consequences for their financial wellbeing.