Above: The Knight Frank Private Office team
More UHNWIs and their families have made the decision to cut out the middleman when it comes to their investment portfolios by setting up a dedicated family office.
Property is no exception, with private capital increasingly being allocated directly into real estate rather than into closed-ended pooled funds.However, the sector is often more complex than people imagine, although the potential upside of going it alone can be considerable.
Our roles running the Knight Frank Private Office, which deals with both our clients’ residential and commercial property requirements, bring us into daily contact with a growing number of private investors looking for more control of their property assets.
Based on these conversations, the Knight Frank Private office team set out below some of the key factors worth bearing in mind for those looking to create a property investment strategy.
Prepare to compromise
Generally it is accepted that US$100 million is the minimum net worth needed to justify setting up a single family office, which will likely have ten to 12 direct employees looking after the principal’s wealth.
This sounds like a lot of money but within the world of commercial property, where single deals can easily run to the equivalent of many hundreds of millions of dollars, it won’t buy many individual prime investment assets. This makes it difficult to create a highly diversified portfolio. As a result, the temptation is often to look for a larger number of lower-value assets.
This could mean taking on more risk as such assets are often located in secondary or tertiary locations, and also incurring more management costs.
With capital appreciation hard to underwrite in any investment sector at the moment, yield is often the main target. But, as mentioned above, this may be found in secondary markets that could be more vulnerable to any financial downturn, so don’t chase yield at any cost.
Private investors need to have a clear strategy and to accept that it may not be possible to have the level of diversification offered by managed funds.
They must also recognise that, subject to the level of risk that is deemed acceptable, there will probably need to be trade-offs between yield and growth.
Taking back control doesn’t mean going it alone
We have seen an increase in the number of private investors and family offices looking to co-invest or joint venture with other private investors or families into larger real estate projects.
Typically, such a project would be led by one of the families with a particular sector expertise. This can help spread risk, create diversification, open up new sectors and provide access to larger deals, while still retaining a level of control. We are increasingly being asked to help match up potential partners.
Your best advisers could be your children
Many emerging property sectors such as last-mile logistics hubs are being driven by new trends in technology, consumption and demographic changes.
The younger generation is often more in tune with the “next big thing”, so getting children involved as early as possible in the management of property portfolios is not only part of a sensible succession plan but could be commercially astute.
We have seen examples of this being done well, and not so well. Relinquishing some control and sharing responsibility generally creates the strongest family partnerships.
Keep it simple
Governments around the world are increasingly clamping down on investment structures that, while often perfectly legal, are deemed to be designed to avoid the payment of tax.
Such structures are often complex and expensive to set up and may well affect portfolio liquidity. Tax planning is of course important, but when it comes to property it’s often the case that simple is best.