FAmily office

Case Study: Private Real Estate in Focus

The need for additional diversification and risk management with a customized approach brings private real estate into focus for $1bn AUM family office

At a glance

The Challenge

The Family Office had built its wealth in real estate, achieving tremendous success by focusing in a single geography of the U.S. and in a single property type.  The adage - “Concentration generates the wealth, and diversification secures it” was absolutely relevant here.  The Family Office wanted to make investments in other property types and in other geographies to build additional diversification in the portfolio, while keeping its internal team focused on the primary geography & property type.

The Family Office wasn’t interested in the one-size fits all aspect of large funds, for which offerings are a take it or leave it proposition, there is often little to no transparency on what assets are to be purchased, and no LP really matters due to the scale of the fund and the asset manager.

Insights

• Specialization.  Even for a family office with significant AUM, it is impractical to invest directly in all areas where exposure is sought.  Most family offices have a strong edge in their area of expertise, and naturally, it makes sense for the family office to focus in that area for direct investments. For investments outside the core focus, better results are obtained through placing capital with management partners.

• Customization.  Each family office is different and has different needs.  Unlike large fund sponsors,  Prairie Hill can craft custom real estate solutions for family offices – including our outsourced real estate Chief Investment Officer service.    

• Concentration of Real Estate Risks.  Investing in a single geography, and in a single property type exposes the investor to:

Regulatory Risk: As an example, there has been significant regulatory risk develop recently in the residential housing asset types across the U.S.  In early 2024, Congress introduced the End Hedge Fund Control of American Homes Act, which seeks to ban large pools of capital from owning single family homes.  Rent control, too, is returning to the scene – despite voluminous academic research on the negative externalities that result when lawmakers wield this tool.  The key takeaway though is that all such legislation focuses on housing – because it is housing that affects voters.  Industrial and Retail are not even part of the conversation because the lease agreements exist between two businesses. Industrial and retail are a great diversifier for those family offices who have significant holdings of housing assets in their portfolios.      

Geographical Risk:  Geography presents risks when a portfolio is concentrated in one region.  Electrical grid issues, natural disasters, terrorist attacks, etc will have disproportionate impact with concentration. Rarely do these risks affect the entire United States – but the effect in a given geography can be serious.   Geographical risk is intimately related with regulatory risk as well.

Results

The Family Office invested with Prairie Hill in an industrial portfolio as well as a grocery-anchored shopping center/development opportunity.  Both investments were customized as Joint Ventures to fit the needs of the investor. 

Moving Forward

The elements in this story apply to others.  This family office had the benefit of extensive real estate experience – but not all family offices have this experience.  And moreover, many do not have experience in retail and industrial real estate and it doesn’t make sense for everyone to build an internal team.   Investing in opaque funds with poor terms doesn’t have to be the alternative – Prairie Hill can provide a custom solution for retail and industrial that achieves the investment objectives.