Education, Finance

An Inside Guide to
Family Office Real Estate Investments

smartland-an-inside-guide-to-family-office-real-estate-investments.mp3 Some family office real estate groups set up their own real estate investment platform, which is run by the family office... Listen to this article

Introduction

There has been much written about the influx of institutional capital entering the real estate market. However, falling more under the radar, has been the money family offices are investing in real estate.

Family offices are a relatively newfound phenomenon. As they have really only become popular over the past few decades. As the number of ultra-high-net-worth individuals has increased, so has their commonness of them.

These offices are now major players in the real estate investment market. They have an especially strong influence in the multifamily realm given their overwhelming preference for this real estate asset class.

In this article, we provide a detailed look at family office real estate investments.

What is a family office?

Family offices are a unique and discrete form of organization that has grown in popularity since the 1980s. These office manage the wealth of single or multiple families. This can include but is not limited to their investment portfolios.

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The offices can also manage the wealth and assets of their families. Most manage portfolios worth tens or hundreds of millions of dollars each.

These offices are designed to operate discretely. Ultimately, to avoid publicity and protect the privacy of their beneficiaries.

As a result, the information about them can be rather limited.

According to a 2019 study, there were an estimated 7,300 family offices globally. 3,100 in North America with an estimated net worth of at least $150 million.

However, as an investor, the role and importance of these offices can not be denied. For the past 10 years, they have steadily grown in their presence in the real estate market.

Family offices are a unique and discrete form of organization that has grown in popularity since the 1980s.

They are increasingly competing with institutional investors and private equity firms for deals. A significant amount of this capital is being invested explicitly into multifamily properties.

Roles and Responsibilities of a Family Office

While the exact services provided by a family office can vary, most provide some combination of the following financial services:

  • Financial planning, including investment advice and risk management
  • Optimization of investment portfolios across all asset classes
  • Detailed accounting and regular reporting of asset performance
  • Insurance analysis and management
  • Generational wealth and estate planning
  • Strategies for philanthropic giving
  • Property and asset management
  • Assistance with purchasing high-value property (e.g., property and aircraft)
  • Select legal services
  • Tax advice and regulatory compliance
  • Personal lines of credit
  • Business and family travel

Types of Family Offices

As briefly stated above, these offices can be structured to oversee the wealth of single families or multiple families. However, there is another type of family office, called an outsourced family office. We look at each type in greater detail below.

  • Single Family Office (SFO)

    Single-family offices, which despite their name have nothing to do with single-family real estate. Instead, these are the offices that oversee the assets of just one family. SFOs are generally utilized when a family has a net worth exceeding that of $100 million. (Some experts have suggested that unless a family has more than $500 million to manage, the costs to run an SFO—which can be up to $1 million per year—may not be worth it.)

  • Multi Family Office (MFO)

    Some high-net-worth families have substantial assets (usually a net worth of at least $25 million). However, it’s not enough to justify creating their own family office. Instead, these families opt to join a multifamily office or an MFO. MFOs’ have a team of specialists who can work with each family based on their specific goals and investment preferences. An MFO can also leverage the group’s collective wealth. For example, all of the families represented by the MFO, to invest in larger deals. This opens the door to more attractive investment options that each individual family may not have access to otherwise. On a per-family basis, MFOs tend to be more affordable; most offices charge fees between $50,000 and $500,000 per year. This cost-sharing model attracts families who still want access to high-touch service and significant investment expertise.

  • Outsourced Family Office (OFO)

    An outsourced family office (OFO). This is when an individual representing a family is the main point of contact with different third-party professionals.

    These third-parties, which can be financial advisors, accountants, tax advisors, lawyers, etc., don’t only work for the office. They provide services to the OFO as needed.

    An OFO can be substantially more cost effective than an SFO or MFO. OFOs, however, have less control than they would if all third parties were internal employees working in specialized roles.

Holding Company vs. Family Office

The terms “holding company” and “family office” are often used alike. However, they are two unique entities. A family office is a holistic, full balance sheet management solution for ultra-high-net-worth individuals or families.

Whereas a holding company is simply a portfolio of business equity stakes. Similar to that of family offices. Many holding companies are designed to easily invest in business opportunities that arise. However, a holding company does not provide the same hands-on management as a family office.

Family Office Investments in Real Estate

A 2021 study of family offices found that 86% of family offices remain bullish on the economy. An estimated 46% of North American family offices indicated that they would be seeking new investment opportunities in 2022. Many of these investments will be in real estate. Less than 4% of family offices indicated that they would cut back their real estate portfolios.

A 2021 study of family offices found that 86% of family offices remain bullish on the economy.

This comes as no surprise since real estate is the third most popular asset class for family offices to invest in. Nearly 80% of these offices invest in some type of real estate.

By some estimates, real estate makes up an average 22.7% of family offices’ investment portfolios.

The most popular sector family offices in North America invest in our residential homes/multifamily apartments (88%). Followed by office investments (56%) and industrial/logistics (46%). Retail (35%) and hotels (29%) are less favorable asset classes among family offices.

A study by FORE magazine confirms that the number one property type among family offices is multifamily. Their survey finds that 76.4% of families like to invest in this asset class.

When asked about their investments in real estate, family offices were quoted as follows:

“Offices are very challenging right now, obviously … We focus on the few places that you can get good quality yields in today’s environment. And the tax benefits are just tremendous, so yes, I think we’ll continue to allocate.” -CEO of a Tennessee-based family office

“We have a mix of real estate investments, and I want to continue to put our money into real estate.” -Principal of a single family office in California

“We have a number of legacy real estate positions we’ve held onto. We’ve also been approached by various funds to invest in new deals. We looked at opportunity zone projects and chose not to invest in them. Like many family offices, we were really concerned about how COVID-19 was going to impact valuations. I think real estate got oversold. We’re seeing prices bounce back now, much faster than what anyone would have expected, so we probably should have invested more than we did.” -Managing director of a Massachusetts-based MFO

In other words, for the same reasons individuals are interested in investing in real estate (e.g., tax benefits, economic resiliency). So are family offices. These offices also report investing in real estate. Oftentimes, this is because it is a hard asset that can create a legacy for future generations.

How Family Offices Invest in Real Estate

There are generally five ways that family offices invest in real estate.

1. Maximum exposure to real estate.

If the family has obtained their wealth through real estate, likely they will maintain the high exposure to it as well. These families tend to have robust real estate experience.

2. Internal real estate platforms.

There are some families that opt to set up their own real estate investment platform. The family office then runs these platforms.

This is often the case when families are interested in investing in real estate. However, they don’t hold any previous experience. These platforms then generally need to hire experts to manage real estate properly.

3. Passive investments in real estate.

Some family offices do not have the expertise or bandwidth to manage real estate.

Instead, the office will work with a skilled sponsor to passively invest in real estate. During this, the sponsor oversees the property management, providing updates and reporting directly to the family office.

Most family offices will invest with four or five sponsors at a time. This helps to diversify their portfolios and mitigate risk.

Initial investments may range from $250,000 to $5 million or more. Once a family office is comfortable with a sponsor, those numbers can quickly increase.

4. Real estate ETFs and mutual funds.

A small number of families invest in real estate ETFs and mutual funds. These families tend to do so when their real estate knowledge is very limited. Nonetheless, the family still wants exposure to real estate.

5. Real estate lending.

As cap rates have compressed, more family offices are making private real estate loans. They are attracted to the lien being secured by real property. With interest rates on the rise, the returns can be quite compelling.

An estimated 31% of family offices have increased their private lending over the past 12 months. Due to the rise in competition for assets. Private lending has become the new and less crowded space for these offices to gravitate towards.

Conclusion

Family offices control upwards of trillions of dollars’ worth of assets. Many of those in the real estate sector. Understanding how and why family offices invest is important for sponsors looking to raise capital from them. As family dynamics change, how those families feel about asset classes within real estate, risk and specific markets may also change.

Most important to note. Sponsors must understand that these offices are attentively focused on their client’s wealth preservation. Sponsors who incorporate capital preservation into the core of their business strategy. Oftentimes place themselves in a good position to work with family offices in the future.


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