These are important drivers of real estate market activity today and are likely to be even more important ones in the future.

Family offices invest and manage assets with the aim of preserving the wealth of the respective families. Information on what proportion of these assets is managed by professional family office structures is very limited. According to estimates, there are around 5,300 single-family offices worldwide, of which around three-quarters are located in North America and Europe. In addition to single-family offices managing the capital of only one family, there are also numerous multi-family offices that professionally manage the assets of up to several hundred families. 

While real estate was regarded as a safe asset class for family offices in recent years, the tide now seems to be turning, since the yields of government bonds on the one hand, and the financing costs on the other, have been soaring for months. In addition, the long period of low and stable inflation since the turn of the millennium is over. In the past several years, family offices have been able to leverage real estate assets on a long-term basis through very favourable loans, thus optimising cash-on-cash returns and the internal rate of return. This made it possible to achieve highly attractive spreads compared to bond yields in most regions, especially in Europe. Due to the recent interest-rate turnaround, this clearly positive leverage effect is now history for the time being – the changed environment will put upward pressure on real estate yields in some segments, with spreads narrowing markedly. Nevertheless, real estate has a number of features that continue to make it attractive for family offices – especially because of the usually very long investment horizon that family offices tend to favour.  

In line with their objectives, not only do professional family offices strive to generate attractive returns, they also aim at a conservative value preservation, thus creating a solid legacy for future generations. Within this scope, professional family offices also rely on the strategic inclusion of alternative asset classes. Real estate investments have always played an important role in this context and this has been further accentuated in recent years. Allocations to direct real estate investments by family offices are not transparently disclosed and, according to estimates, may range from 10 to 20% of the total allocation. After all, high-quality real estate is well suited to asset preservation and can also generate considerable capital growth over long holding periods. This is a key argument for family offices, especially in the case of cross-generational investment strategies.

A comparatively low correlation with equity markets makes real estate particularly suitable for diversifying family offices’ portfolios, comprising equities, bonds and other alternatives. Moreover, real estate can cover a wide range of investment strategies – from ‘core’ or ‘core plus’, to ‘value added’ or ‘opportunistic’, each with the corresponding return and risk potential.

Stable and predictable cash flows – and thus robust distributions – that can be achieved with real estate are particularly attractive. Demand and performance are closely correlated with demographic and economic factors. At the same time, the income generated is partly inflation-adjusted, as leases typically provide for rent increases linked to the development of inflation or other indices. This is a factor to partially stabilise cash flows of the portfolio that meanwhile should not be underestimated. The separation of operating assets/family businesses from assets professionally managed by a family office is often another key motivation in times when family enterprises may be faced with significant challenges and disruptive developments and instability in business models and industries. Investing in bricks and mortar can also be motivated by the desire to safeguard parts of the wealth from the operative family business.

Family offices regularly face the question of how to achieve a sensible (often global) real estate allocation, a bespoke investment strategy and an appropriate degree of diversification. Family offices can basically consider two strategies: 

(a) indirect investments, where the investor acquires shares in a fund or a listed or private real estate company; or 

(b) direct investments, where the investor directly acquires a specific property or portfolio.

An indirect investment in real estate is perceived as an uncomplicated and quick solution for rather ‘passive’ family office investors. One advantage can be a high degree of diversification, especially in larger fund portfolios. In addition, investors can choose products which offer access to specialised areas, such as particular property types or geographical regions as well as ‘themes’. For listed funds, the higher liquidity is also advantageous. However, even when investing in special funds, these investments are hardly tailored to the often very specific preferences and risk appetite of the respective family office. It is crucial to have an in-depth review of fund managers, their brand and performance. A further benefit of indirect investing is that established fund managers are typically regulated and should operate based on ethical codes and governance standards.

On the other hand, from a long-term orientated family-office approach, the term of a fund might be not optimal. In addition, changes to the fund strategy or investors’ preferences require consensus with other fund investors, resulting in limited flexibility.

Direct investing empowers to invest in what investors are passionate about.

Asset strategies can be adopted at any time and in line with market development. With that and as an important aspect, family offices have control over asset selection, investment process and especially the timing of transactions (acquisitions and dispositions). With that control and flexibility, family offices can focus on maximising their total returns over one or more real estate cycle(s) rather than managing short-term volatility. Optimising end-period wealth should be a key investment objective, not the management of mark-to-market valuation or cash flow volatility, to the extent that such volatility will not force unwanted changes in the balance sheet, cash flow management or investment strategy.  

Many (larger) family offices have increasingly established superior in-house competence in defining individual investment strategies even with a view to value-add and opportunistic profiles, also involving investing (and co-investing) in development projects. One of the preferred ways to enter real estate investments is to partner with professional best-in-class investment managers. Selecting the adequate operating partner is crucial and sometimes a challenge and requires a diligent review. Care should be taken to ensure that managers have a long-term successful track record in their local markets or their respective specialisation in certain property types. The real estate industry is currently adapting to evolving market conditions, a changing regulatory environment, and a fast-growing technological landscape and disruption of business models. Environmental awareness and legislation further increase the stakes. The current period of economic uncertainty and more cautious markets, the excellence of investment managers becomes a true and crucial differentiator.

When working with investment managers and/or co-investors, congruent values as well as investment strategies are essential. When looking at assets that are intended to outlast and benefit generations, sustainability is also becoming increasingly important for most family offices – not only does it provide additional security for long-term value stability, it also plays a fundamental role for future generations. 

Family offices and the private-wealth sector will continue to be key in global real estate markets. This development is particularly driven by the expanding family office wealth base as well as increasing allocations to real estate as part of their alternative assets.