The family office is becoming more common as an increasing number of ultra high net worth (UNW) individuals set up private professional services firms to manage their investment portfolios and regulatory needs.
The fundamental goal for these ‘family offices’ is to manage and enhance their client’s wealth, whilst maintaining professionalism, discretion and privacy. The family office is also able to manage the charitable and philosophical goals of the family in question.
When it comes to managing family wealth, one of the most significant issues facing wealthy individuals and their families, is wealth succession.
Being able to plan and efficiently transfer wealth across generations and ensure the harmonious succession or professionalisation of a privately-owned businesses, whilst retaining reputation and wealth, represent significant challenges for the family office.
Since the pandemic, there has been a substantial change in investment behaviour and choice of asset class investment, to make the best financial returns.
As the events of the last year have shown, the financial risk from global viruses is even greater than economic or political peril, and an investment strategy needs to recognise this. COVID-19 has wreaked havoc across markets and sectors, requiring a much more coherent and agile investment strategy from the family office.
Property assets represent a significant proportion of family wealth, and are an essential component of a balanced investment portfolio, providing the opportunity to maximise investment returns, where other investment options such as stocks and shares or bonds may not.
Property investment also allows the family office to mitigate risk and diversify portfolios, enabling targeted investment decisions at a geographical as well as sector and tenant level, providing more overall control over assets through ownership structures, asset management and diversification of lot sizes.
Even before COVID-19, online shopping was growing in popularity, adversely affecting retail property. Compounded by the effects of COVID-19, family offices associated with High Street retail, in particular department and fashion stores, have seen significant impairment of assets under management.
Numerous family office retail investment owners are now considering the repurposing of their High Street retail assets to off-set the losses in rent and increases in yields seen over recent years.
This is typically achieved by reconfiguring upper floors as residential or change of use to a more stable sector such as offices. However, this market will remain challenging in the short term.
Whilst the attractiveness of investing in High Street retail property has now been diminished, this is not universal across the sector with convenience stores and supermarkets thriving.
As work patterns have changed on the back of COVID-19, the office sector has been hit hard.
Increased working from home, better use of technology with video conferencing, together with a rise in unemployment, have all contributed to occupiers suddenly finding their office less relevant, leading many to reassess their future property needs.
Many see staff working from an office five days a week as a thing of the past, with flexible working and two or three day ‘in the office’ week, the way of the future. Naturally, this reduces their space requirement and the family office may need to re-evaluate their holdings, to explore potential alternative uses in order to maintain asset values.
Industrial and other markets
Logistics, data centres and agricultural land have all been seen as buoyant markets, or possibly safe havens, with the industrial sector experiencing a 10-year high in 2020.
Investors need to recognise that most sectors are, to a greater or lesser extent, discretionary occupations. By this we mean the physical real estate is not necessarily fundamental to the future success of the business.
Office demand has been diluted by home working, physical retail has been impacted by online shopping, trends in logistics change quickly, and who is to say that large distribution centres with ‘last mile’ satellite units will prove to be a long term model?
Opportunities on the horizon?
The sectors that appear to have a more stable future include the residential market, health care and social care sectors, with 51% of family offices in Europe allocating capital in the residential market.
As the population ages, demand in these sectors, whether capital or rental, will continue to increase, regardless of economic climate.
With many cities experiencing increases in population, yet a lack of residential space, this creates another opportunity, with the potential to repurpose retail and office space for residential use.
Even if there is no capital appreciation, or values fall, residential property still offers a passive income stream and cashflow through rental income.
And let’s not forget the potential of development land which can be acquired and enhanced with planning use, be developed and then either retained for income or sold for capital gain.
Opportunities also exist to invest in properties for personal use, as well as the growing build to rent sector, affordable and social housing, and houses in multiple occupation.
We are therefore seeing more professional investors look much more seriously at residential investment on a larger scale instead of making ad hoc purchases.
If property forecasts are to be believed, the property market will fall back in the short term, but it will recover. This means that property investors will need to consider the longer term rather than with short term gains in mind. Along with the passive income gained from residential investments, there will potentially, over time, be some form of capital growth.
So, despite overall investment uncertainty, there remain opportunities in the property market for the family office investor to reap healthy returns for their clients, but it is important to carry out the necessary due diligence and research first.
Our family office property experts can help to leverage property opportunities, providing the technical property due diligence necessary to maximise return on property investment – from development and planning expertise and valuation advice, to Capital Gains Tax valuations and market due diligence with effective asset management and expert business rates advice.