Real deals: Why more advisers are turning to real estate now

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Tangible assets have pulled ahead this year as a popular alternative investment option for high-net-worth investors. According to a recent U.S. Trust survey, nearly 60% of HNW clients were optimistic about land, timber and investment real estate — more so than were enthusiastic about stocks, bonds, hedge funds and private equity.

These statistics are helping fuel a growing business at U.S. Trust, the elite wealth management unit at Bank of America, and a growing number of advisers across the industry are also catching on to the trend.

Scott Edwards, Michael Occhiuto and George Kursar began focusing on tangible assets after joining RBC Wealth Management in February. The advisers operate a practice in New York, where real estate prices have surged this past year.

Even while industry observers worry that the market may have plateaued, Edwards, Occhiuto and Kursar are finding clients who still have a strong appetite for real estate investments. "Clients are looking for capital appreciation and income yield from rentals," Occhiuto says, and real estate investing can provide a steady source for both.

The risks can be high, given what happened during the 2008 financial and real estate crisis and the illiquid-nature of these investments. "We always tell our client base that the potential opportunity is plentiful, but like every asset class, there is no guaranteed profit," Kursar says.

There are, however, what appear to be telling signs from the real estate market that suggest conditions may be right for clients to buy up these assets. Commercial rents in particular, especially in central business districts, are providing investor opportunity, according to a recent Cushman & Wakefield study.

"We always tell our client base that the potential opportunity is plentiful, but like every asset class, there is no guaranteed profit," says George Kursar, RBC Wealth Management

Across the U.S., average office rents rose to $28.15 per square foot at the end of 2015, up 4.2% from the same period in 2014. Hot spots such as Silicon Valley led the way, with an approximated 20.7% growth rate.

A separate study on shopping complexes, also conducted by Cushman, shows that the average asking price for rent in retail outlets, particularly shopping centers, increased by 6.5% in this first quarter from the same period a year before, up to $26.08 per square foot.

What's the draw? Portfolio diversification and non-correlated returns can help clients ride out volatile markets, says Dennis Moon, managing director within specialty asset management at U.S. Trust.

HNW clients are looking to tangible assets and other alternative investments to provide a constant stream of returns, as fixed income continues producing low yields due to low interest rates. "They use it to hedge against inflation and for diversification purposes," Moon says.

RBC's Kursar says his team has found growing opportunity in Texas, where there is job growth potential. He cites Toyota's recent effort to relocate 3,000 jobs to the state from California.

There is also Austin's booming tech industry, along with San Antonio's efforts to boost local financial services. Most clients want to buy properties there, Kursar says. They also have interest in New York, Florida and California.

"Our clients already have the expertise and direction of where they want to invest," notes RBC team partner Edwards. "They come to us, and we help them fine-tune and sharpen their investment direction."

Deal sizes could range from $25 million to $1 billion for the trio, they say. The average size is about $100 million to $300 million, and properties are sometimes purchased using leveraged financing available through RBC's other business services, including its investment bank, and with help from multiple investors.

Investment returns vary per deal, the team says. However, the trio explains, clients are looking for returns upward of 10%, higher than traditional markets.

Clients who come up short on funding for some of the largest deals are encouraged to team up with other investors. "We deal with a lot of family offices, and we realized that a lot of the time they are doing the same thing at the same time," Edwards says. "We would introduce client A and client B, and they might create a joint venture to invest in a project."

The team also connects their clients to RBC's private equity clients in cities including Los Angeles, San Francisco and New York, where real estate prices may be too high for single investors. These often involve commercial real estate deals.

Private equity investors working with RBC's investment bank may already have existing property offerings in these cities; this opens opportunities for wealth management clients.

U.S. Trust clients, on the other hand, make their purchases in cash. These clients typically have $5 million or more in investable assets with the firm, U.S. Trust says.

The firm's advisers also take a more comprehensive approach to real estate investments. In addition to providing investment recommendations and helping clients execute ownership transactions, U.S. Trust provides clients with property management, marketing, sales and disposition services.

"Right down to rent collection, or changing a leaky faucet, we have [contractors] doing that," says David Koletic, U.S. Trust's head of strategic real estate services. "Unlike a real estate broker, who only looks at the sales transaction of things, we look at everything."

"Our clients already have the expertise and direction of where they want to invest," says Scott Edwards, RBC Wealth Management.

U.S. Trust has also seen strong demand for industrial assets such as timberland and farmland. Farmland alone has offered growing opportunities, with values increasing more than 30% from 2011 to 2015, according to the Department of Agriculture.

Moon and his team help clients gauge returns and income flows based on crop ages and harvesting times, while most of the income is derived from leasing the land to farmers. "We act as fiduciary managers and asset managers for our clients," says Koletic.

The process of identifying an attractive tangible asset begins with identifying a client's investment characteristics and risk profile.

Koletic says that starts with a sit-down interview. "Clients will tell us about their choices and goals. This includes geographical preferences," he says.

U.S. Trust offers clients a team of experts with vetted research and real estate investment options. The firm has over 40 on-site real estate experts across the country, conducting research and identifying key potential markets where clients can invest. This produces a significant supply of potential options. Thus, the firm develops a customized framework for the client, includes expert analysis and recommends an investment strategy.

"Within three to four weeks, we could identify specific live and viable deals," Koletic explains. "A client could expect to close a deal in four to six months."

Investments typically make an average return of 8% to 10% and produce an income return of 4.5% to 6%, net of management fees, Koletic says. U.S. Trust charges an asset management fee that ranges around 100 bps. It also imposes a 2% acquisition fee and a disposition fee of 2% to 2.5%. These fees, however, are negotiable depending on the relationship of the client with the firm, the firm says. Essentially, U.S. Trust customizes real estate portfolios according to the wants and choices of clients.


"Consumer confidence levels have come back from a U.S. perspective," says David Koletic, U.S. Trust's head of strategic real estate services.

The 2008 subprime mortgage crisis was devastating for many investors and remains fresh in their minds of many, which leads to the question: Why would clients invest in an asset that is so illiquid and risky?

Clients at U.S. Trust, Moon says, have shown more confidence in the market and a willingness to take on the risk for higher returns. "Consumer confidence levels have come back from a U.S. perspective," he explains. "We are bullish on the U.S."

There is a bit more hesitation at Raymond James. Chase O'Malley, an alternative investments associate at the firm, points out that, "regardless of a client's real estate investing objective, there is a benefit to owning a diversified pool of assets.

"A potential investor needs to consider the risks, costs and limitations prior to investing in any investment product," Chase adds. "This is particularly applicable to real estate, which is typically comprised of illiquid underlying holdings, and requires considerable knowledge and familiarity with local markets."

Raymond James makes real estate investing an option for its clients, but hasn't seen the same interest tick upward for real estate investment opportunities, for the matter any tangible assets. RBC takes the factors Chase mentions into account and says its clients are ready to take on the risks.

"They are able to digest this," Edwards says. Occhiuto adds that the firm's clients who invested in these illiquid assets are typically in it for the long run.

"They are [in it] for generational purposes, and they want to pass them down," explains the RBC adviser. "And clients like control. They want things to run exactly how they want it to be."

Because most of these investments are passed from generation to generation, the holding period could span over 70 years, according to RBC. More than 80% of respondents in the U.S. Trust study say they prioritize their future goals over current needs.

"Mainstream HNW clients who are in nearer-term liquidity needs would invest in REITs," says Daniel Kern, chief investment strategist at TFC Financial. "No muss, no fuss."

"Mainstream high-net-worth clients who are in nearer-term liquidity needs would invest in REITs," says Daniel Kern, chief investment strategist at TFC Financial.

U.S. Trust has also seen a growing number of young investors expressing interest in tangible-asset investments. "Their interest is mostly aspirational and driven by strong passion. They are skittish about traditional investments," Moon explains. "The Silicon Valley boom has seen a lot of them make a bulk of their wealth at a very young age. [And] they are looking into other alternative investment vehicles."

The U.S. Trust wealth insight study also suggests that younger HNW investors are more bullish and optimistic about future markets. In fact, young investors are more likely to invest in sophisticated, non-traditional assets than their more senior HNW peers. The approach to take with clients is what defines the business, Moon explains.

"It is having the expertise and the talent, the ability to articulate the structure of the investment and meet the clients that is the challenge," says the executive.

It does help to have knowledge of "commercial real estate or any segment of real estate," he adds.

Real estate investments "are not exactly that different from traditional wealth management. In fact, they fit together but [are] just different asset classes," Moon says. "You cannot just stick to traditional assets."

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