Over my career I’ve come to understand that each family office has its own unique DNA and investment strategy; yet many face similar challenges around estate and succession planning, their legacy, and the preservation and creation of wealth for future generations. Real estate has a unique ability to address many of these key concerns, which is why globally nearly one-fifth of all private family wealth resides in real estate. However, when faced with market and political uncertainties, high asset prices, low yields, possible trade wars, interest rates movements (or not?), family offices need to be prudent yet well-positioned to take advantage of any market opportunities.
Real estate cycles and strategy
Real estate markets are cyclical in nature and the secret to unlocking value lies in the ability to deploy capital, conservatively or opportunistically, at different points of the cycle. However, private offices should play to their own strengths and risk tolerance, and in sectors and markets they understand. Private capital has distinct advantages over institutional capital, particularly in times of uncertainty, with the ability to make quick decisions and to buy, hold or sell assets as needed.
Having a global portfolio is perhaps not always the right strategy. I encourage family offices to focus on one or two markets, rather than spreading too widely across the globe. These should be markets they have an affinity with, where they understand the tax and legal implications, and have expertise in a particular sector. Asset management is a key issue and determining whether to deploy a team in a market or own assets from afar has a direct implication on the type of real estate a family office should acquire.
Family offices going up the risk curve for more value-add/opportunistic returns must also ensure they have the right team and/or aligned JV partners with sector-specific experience in those markets to truly execute their vision. There is no substitute for visiting an asset first hand as any building can be portrayed as ‘sexy’ from afar. Conducting full due diligence with the right advisors, both from a real estate perspective, and from a tax/structuring perspective, is instrumental in mitigating risk.
Exploring the gateway markets
Key gateway markets including Hong Kong, Singapore, Japan, London, New York and Sydney provide stable yields for core office properties and remain attractive to family office investors. Major European cities have also witnessed an influx of interest and investment. The US-Sino trade war and Brexit are obviously affecting sentiment but at the same time they are creating their own set of opportunities. With yields relatively tight in most core markets, some investors are looking to secondary markets to achieve higher returns. When entering an investment, it is important to understand any future exit strategy and the liquidity of real estate in that location, even if the plan is to hold over the longer-term. For overseas markets, family offices should be aware of any currency exposure, and hedge accordingly where necessary and practical to do so.
Closer to home – Hong Kong and the 'new' trends
For those of us closer to home, Hong Kong is by its very nature one of the most exciting sentiment-driven real estate markets in the world. Yields are tight here, yes. Opportunities are hard to come by, yes. Pricing, by global standards, is crazy high, and the impact of the Greater Bay Area initiative is likely to further fuel demand for real estate in Hong Kong. For those private families willing to dig a little deeper, despite the picture-postcard skyline, Hong Kong is an oasis of old buildings crying out for a new lease of life. There is untapped potential in sectors such as industrial, hospitality, regional retail and office; and locations such as Wanchai, Western District, Wong Chuk Hang, Island East, Kwai Chung, Hung Hom, Tuen Mun, San Po Kong, Sham Shui Po, To Kwa Wan, Kowloon East, Jordan and Mong Kok all have huge potential.
The way people live, work and play will continue to evolve. Many second and third generation members of private family offices are acutely aware of this and are taking the lead in bringing more to real estate than traditional bricks and mortar. They are focusing on creating a sense of place by infusing local culture, wellness, technology and social interaction, with cutting edge design, sustainability and social impact. Real estate investment strategies which embrace these trends while serving key societal needs will be successful. Ultimately real estate is about creating an experience for its users and its surrounding community. The lines separating work and play are rapidly disappearing, and it is the private family office investors who are pioneering many of the latest trends.
It would be amiss for me not to mention Proptech, where the convergence of property and technology is changing the way investors acquire, build, manage and interact with real estate. It is a sector all family offices should be aware of as it directly impacts the tangible assets in their portfolios. It also presents a key sector for possible investment.
Real estate has been and will continue to be the creator and preserver of wealth. For me, with my role in the Capital Markets & Investment Services team at Colliers International, it is first and foremost about understanding the overarching objectives of the families we work with and advising how real estate aligns with their core values and strategy. At this intersection, opportunity is born. Some families have been in the real estate business for generations, and others invest in real estate as a way to preserve their wealth and diversify.
With family office allocations to real estate set to increase it is important to stay on top of the market and feel its pulse to capitalize on any opportunities. For private families looking at Hong Kong or gateway cities, please do not hesitate to message me. I welcome the opportunity to learn more and share ideas.