Family offices play a crucial role in the investment and management of funds to sustain long-term wealth. Post the global financial crisis in 2008, the stock market has consistently hit its peak levels with global wealth rising like never before. Family offices have always facilitated the elite in taking control of their financial fortunes through single or multiple-family offices. As per the research conducted by Dominic Samuelson, CEO of Campden Wealth, family offices currently hold assets over USD 4 trillion globally. The credit goes to the colossal increase in the number of billionaires across the globe.
The world we live in is unpopular for its unequal distribution of wealth, which is one of the biggest reasons for the swift rise of family office culture. According to the Global Wealth Report -2019 from Credit Suisse, 44% of global wealth belongs to 46.8 million millionaires. Advent in technology and easy access to information has allowed the elites to leverage investment management solutions that were exclusive to investment banks earlier.
Family Office: What does it mean?
A family office is a comprehensive financial shop for opulent people. It serves as wealth management and financial advisor for high net worth (HNW) clients with a special focus on the “ultra-high net worth’ segment. The “ultra-high net worth’ category is usually defined as anyone with $30 million or more to invest.
There are two main models of family office:
The Single Family Office: Single Family Office is a financial advisor that serves only one client and manages their massive fortune. This concept originated in Europe.
The Multi-family Office: Due to the emergence and implementation of innovative technologies, the efficiency of financial firms has expanded and they have started serving several clients at the same time. The multi-family Office firms serve more than one client although the client base of multi-family Office firms remains the super-rich high net worth (HNW) individuals.
Services Offered by the Family Office:
The major services offered by the Family office includes – tax planning, investment management, budgeting, insurance, wealth transfer, managing the buying and selling of properties, guiding the firms on their charitable donations, advice, concierge, and other wide range of services.
The prominent factors that attract the world’s elite towards the family office model include – cost-efficiency, increased customization, flexibility, and greater control.
Exponential Rise in Family Office Culture in the Middle East:
The importance of Family offices is rising every day for the real-estate markets in the Middle East. In the last decade, there has been a colossal rise in the transfer of wealth from corporations to individuals in the region. According to the research conducted by the Boston Consulting Group (BCG), the privately-owned assets in the Middle East will account for US$11.8 trillion by the end of the year 2020 (report post-COVID), with the UAE, Saudi Arabia, and Kuwait, accounting for over 22% of the total.
As per the report by Campden Research in July 2019, pre-COVID there was no sign of this trend abating, with key global research, quoting that there was estimated to be 7,300 single family offices worldwide, with collective estimated assets under management of US$ 5.9 trillion. Meanwhile, the wealth of the families behind them totals a vast US$ 9.4 trillion. With such a huge pace of wealth transitioning in the hands of private players, the family office culture has emerged as a key influencer in the private wealth sector in terms of fund investors and structuring trends.
There is huge outstanding liquidity on the wealth held in Gulf nations. Around 82% is held in investable assets as compared to the global average of 60%. As per PricewaterhouseCoopers (PwC) Private Equity Trend Report 2019, 73% of private equity firms consider family offices as the potential investors in their next round.
Factors Driving Allocations of Family Offices in the Real Estate:
In the last few years, there has been a rising trend of Family offices increasing their allocations to real estate. The top reasons behind this rapid increase include – asset class outperforming other asset classes, low-interest rates paid by the banks, and the potential of wealth that real estate can create for the future.
Here are the different motivations for family offices to invest in Real-estate –
Diversified Asset Allocation:
There has been a rising trend of diversified asset allocation as several families consider real-estate and hard assets as an indispensable component of a balanced investment portfolio. Since its inception in 1950, Modern Portfolio Theory (MPT) has had a major influence on institutional investor allocation strategy. Taking the idea from the MPT, the Yale Model was developed and imitated by several institutional investors. These investors witnessed numerous benefits of deploying capital away from traditional methods such as stocks and bonds, in favor of alternative investments including hedge funds, private equity, and real estate. It has become standard for institutional investors including family offices to consider diversification and alternative investments outside of purely stocks and bonds.
Boosts Cash Flow:
Family offices prize cash flows and revenue streams in their investments. A family-office can own property based on the structure of the real estate investment which provides it with cash flow. Family offices always allure the clients to owe properties by highlighting them the opportunity to earn income on top of asset appreciation. Family offices also target those families which are least interested in investing in the real estate market through other indirect ways of investment which has a positive impact on the cash flows of the real estate firms. These involve – limited partnership funds or agreements, Real Estate Investment Trusts (REITs), mortgage securities, royalty trusts, and other real estate-related vehicles. This has a positive impact on the cash flows of real estate firms.
Lower Interest Rates:
Global investors especially from the US and Europe are exploring inflation hedges due to very low-interest rates in these countries. A list of hard assets with basic value such as – gold, land, timber, foreign currency, etc. has become a standard component of many investors’ portfolios. Several family offices perceive the real estate sector as a method to gain from an increase in asset prices and income benefit from rising asset prices to earn income from multifamily housing, commercial buildings, and hotels.
Longer Investment Period:
One of the most distinctive aspects of a Family Office is they have a scope for long-term investment. The single-family office is under no compulsion to distribute returns to investors like LP funds. Family offices are under less pressure for achieving their short-duration gains if there is an opportunity for greater benefit over a longer investing period. They guarantee better performance because of the long-term horizon. Family office might perform poorly compared to fund or could sell at any point in time, the long-term mindset offers extra flexibility with a broader mandate than other investors. Family offices are the best and most preferred option for the real-estate sector as it follows a longer investing cycle than public equities or fund investments and serves the purpose of long-term investing.
The Volatility Index (VIX) is the most preferred indicator to compare volatility. According to VIX, real-estate is a much stable asset class and far less volatile compared to public equities, which have gone through a very long phase of volatility in the last two decades.
Offers Direct Control over the Investments:
There has been a major shift in the desire of the elite class to directly control the investments in the portfolio. This has been the biggest growth driver in the rise of a family office. Post the 2008 financial crisis, the world was seeking an option that offers transparency. Family office emerged as a preferred choice as it facilitates direct investments. Direct investments bring transparency by allowing the investors in exercising complete control over the investments and internally managing the deal processes. In the case of smaller deals, direct investing is the preferred option to purchase real estate properties, or in buying a stake in a firm.
Family offices have emerged as a blessing in disguise for the real estate sector in the case of any market correction. They can be swiftly allocated to the real estate sector as they have limited downside. Family offices minimize the possibility of complete loss of the investment value.
Family offices are the need for today’s dynamic world where markets change rapidly. Not only the real-estate but every industry must increase allocations into Family offices to ensure a better and safe future. Since the dawn of the 21st century, the global economy has been trembled by the failure of Lehman Brothers, and American International Group (AIG). The billion-dollar corporations have ended up filing for bailout packages. Hedge funds ended up losing a majority of their investor’s capital. To counter these catalogs of volatilities, investors are showing interest in investments with intrinsic value and limited downside. Undoubtedly, there is no better option than family offices. Realizing the potential of Family offices and benefits it offers, real-estate firms are increasing allocations into it. Real-estate investments provide family offices with a degree of comfort in comparison to other asset classes that have not been successful in meeting the dynamic expectations of the investors.
As they say, if there is one thing certain that’s uncertainty, rest everything is uncertain. The world of real estate and real asset investments is full of uncertainties. To minimize the level of volatilities involved in the process, the investors will prioritize investments with intrinsic value and with limited downside. This will flourish the future of family office as other asset classes were not able to provide investors with downside protection and live up to their expectations.