Asian family offices have record cash balances, putting them in a commanding position to hunt for bargains created by the Covid-19-driven downturn, according to private bankers.

“We are seeing the highest cash allocations that we have ever seen [among family offices in the region],” says Anurag Mahesh, Asia Pacific head of the global family office division at UBS Global Wealth Management. “This leaves them in a good spot to benefit from this volatility. So some are looking to invest, although they are not throwing their caution to the wind.”

That said, today’s historic high cash balances are down to recent falls in the value of other portfolio assets, Mahesh added. Plus family offices typically retain higher cash levels than other clients as they don’t need to rely on portfolio returns to maintain their lifestyle, he added. UBS declined to reveal specific figures for clients’ cash balances.

Anurag Mahesh, UBS

But Mahesh’s feedback reflects widespread caution among allocators. Globally fund managers’ cash levels jumped in April to 5.9%, their highest level since the 9/11 terrorist attacks, according to Bank of America Merrill Lynch’s latest global fund manager survey.

Indeed, most private investors are still waiting on the sidelines. “We haven’t seen much activity in the post-Covid world – [it’s] more about figuring out what to do,” said Mahesh.

As for areas that are attracting interest amid the virus outbreak, wealthy clients have been looking in both public and private markets at defensive sectors such as food & beverage, healthcare and pharmaceuticals, Mahesh said. And “anything digital: a lot of families are researching that for the mid- to long-term”.

One way some family offices have been seeking to do so is by looking to invest in small and medium enterprises that are struggling as economic activity has dropped.

PROPERTY POSSIBILITIES

When it comes to private assets, family offices tend to prioritise property investing – it accounts for 17% of their average portfolio in Asia Pacific, according to the Global Family Office Report published by UBS and Campden Wealth in November.

But they don’t appear keen to stock up on more physical real estate. At least, not yet.

Ariel Shtarkman manages her own family’s wealth (she declined to say what amount), and invested some of it in Hong Kong apartments until 2018, when she sold the portfolio due to high valuations after years of strong market growth. She is also co-founder and managing director of Atom Assets, a real estate investment platform for family offices, and Orca Capital, a boutique real estate advisory practice.

Ariel Shtarkman,
Orca Capital

Shtarkman said that, despite Covid-19, property valuations had not yet fallen enough to justify investing again. 

“We don’t see distress – definitely not at Sars levels, where everything was up for grabs [after the outbreak took a sharp and heavy toll on real estate prices in Hong Kong]," she noted. 

"But this could change, especially in the US," Shtarkman added. "[The] US will be interesting after the dust settles because more leverage could create distress, but will we be able to get on a plane and go to see an asset?”

Others take a similar view. “Real assets are not trading at a steep enough discount yet, due to rescue packages with QE [quantitative easing] in the short term”, said Christina Gaw, head of capital markets at Gaw Capital, a Hong Kong-based real estate private equity firm. “But opportunities may come about in the next six to nine months.”

REIT INTEREST

Real estate investment trusts (Reits), on the other hand, may be worth a look. Gaw said falls in Reit valuations across the US, Europe and Asia presented “interesting opportunities”.

Like other listed markets, Reit have suffered sharp falls. According to Bloomberg the 249 Reits trading in Asia Pacific fell 25% on average in the first quarter of 2020. The Link Reit, Asia’s largest such instrument, fell 15% to the end of April.

Individual families with existing exposures have sustained big losses. SingHaiyi Group in which Singaporean 'power couple' Gordon and Celine Tang own a controlling stake, has seen value falls of more than $300 million in four Reits it owns, this year, reported Bloomberg.

Moreover, Thailand’s richest man, Charoen Sirivadhanabhakdi, who controls property conglomerate TCC Group, suffered losses on Asia Pacific Reit holdings of more than $7.5 billion this year, according to the news agency.

While most family offices have invested in property via physical assets, the large discounts in some regions that have emerged recently between Reits’ share price and their net asset values mean that client seeking increased property exposure might consider Reits over physical assets, said UBS’s Mahesh.

The private clients looking to take advantage of these falls are in many cases experienced real estate investors who have built personal fortunes through their own property businesses. “It is more of an opportunistic play,” Mahesh added. “A lot of them know [the sector] and have made their money there.”