The UK’s super rich have significantly increased their allocation to US real estate, as returns in certain sectors have reached highs of 40 per cent over the past year, according to the Stonehage Group.
Stonehage says behind equities and fixed income, US real estate currently forms the largest proportion of a typical ultra-wealthy family’s portfolio. US real estate now accounts for between eight and 10 per cent of a typical client’s portfolio. Historically, allocations to US real estate would have been close to zero.
In many cases clients’ exposure to US real estate is now almost double that allocated to other alternative investments, such as gold or commodities, where typically no more than four per cent of a client’s portfolio is invested in these assets.
Stonehage explains that property prices in some regions of the US have fallen by 50 per cent since the end of 2007, but that prices have now stabilised and, in some locations, have begun to rise. In these areas the oversupply of housing stock has cleared, and inventory levels are beginning to lag demand, pushing up prices.
According to Stonehage, few investors have direct exposure to US real estate – in most cases the tax implications are too onerous – so most clients are invested via the debt markets, specifically mortgage-backed securities.
John Veale, chief investment officer at Stonehage Investment Partners, says: “The US housing market suffered after the crash of 2008, as many banks and other lenders shed real estate assets. This created excess supply, and it took until early 2012 for inventory levels in many US regions to return to pre-crisis levels. We saw this as an ideal time for clients to invest.
“The fund manager we selected for the first client allocation generated a 40 per cent return last year from residential mortgage backed securities. The second allocation later in the year is still in the process of deploying capital, but our return expectations are an annualised 10-12 per cent over the life of the vehicle. We expect to generate returns from both capital appreciation and ongoing yield.
“For our most recent allocation, the investments are mainly concentrated in what we would term tier two areas. For example, the second of the funds we chose to work with has invested in commercial buildings in Las Vegas and Illinois as well as buying a portfolio of residential mortgages from a regional US bank.”