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Family Offices Hunt for Yield in Second-Tier Property Markets

As real estate valuations in top-tier cities soar, family offices and wealthy investors are looking to second and even third-tier cities. Investors have gained better yields and the potential for higher returns while avoiding the looming risks of the traditional real estate hot spots.

Record high property prices in top-tier cities across the world are the underlying reason. Home values in the New York boroughs of Brooklyn and Queens have never been higher, according to a report by appraisal firm Miller Samuel. Property prices jumped to all time fourth-quarter highs in almost two-thirds of U.S. cities, according to the U.S. National Association of Realtors.

Meanwhile, house prices in the most popular global cities are starting to show cracks this year. Hong Kong’s Rating and Valuation Index, a barometer of used home sales in the city, dropped for the first time in 28 months. Singapore house prices also fell for the first time in six quarters early this year, according to Bloomberg.

Factors such as the ongoing U.S.-China trade war and Brexit continue to weigh on the lofty valuations of cities from Shanghai to London, according to the South China Morning Post.

Growing macroeconomic concerns and record-high prices may have pushed some investors to consider second or even third tier options this year. In a recent Bloomberg report, CBRE Group cites Dallas and Philadelphia as part of a basket of second-tier U.S. cities that have seen demand spike from bigger overseas buyers.

Alex James, London-based Associate Partner on Knight Frank’s private client team, told Bloomberg that the notion of ultra high-net-worth investors focusing exclusively on trophy assets was misplaced. “Family offices don’t mind going up the risk scale where they see rental growth and assets to reposition,” he said.

This pragmatic approach is now being reflected in capital flowing out of core property markets and beyond the borders of megacities.

Family offices in the U.S. will increase their exposure to secondary markets and some recently designated Opportunity Zones throughout 2019 seeking better yield and tax benefits, predicts Hayman Family Office’s vice president DJ Van Keuren in a Forbes’ article.

Across the world, savvy investors seem willing to look beyond the boundaries of the most popular and prestigious cities in their hunt for better performance.

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