Inflation is increasing enthusiasm for real estate investments

Article content

Family offices generally focus on wealth preservation and asset allocation as a matter of course. However, like many investors, families often turn to real estate during inflationary periods. Real estate generates cash flow through leasing and rental income, provides a hedge against inflation, offers potential tax advantages and can generate significant returns following appreciation and sale.

While many family offices recognize the merits of real estate as a strategic component of their investment portfolios, some lack the in-house expertise to successfully manage real estate investments.

The North America Family Office Report 2022, developed by RBC and Campden Wealth, notes that family offices have emerged as influential players in the real estate market with 80 per cent of North American family offices and 76 per cent of global family offices investing in this asset class. Many family offices currently view real estate as a safe haven, with this asset class accounting for 14 per cent of North American family offices’ average portfolio (13 per cent globally). Looking to 2023¹, 41 per cent of North American family offices expect to increase their investment in real estate, while 13 percent are planning to decrease their allocation.

“Real estate investment is an attractive option for capital deployment by family offices, because it tends to align with their long-term investment goals,” says Sylvia Rizk, senior director of business development at RBC Investor Services. “Investing in real estate also provides family offices with the opportunity to diversify their portfolios beyond traditional asset classes such as stocks and bonds, reducing risk exposure and enhancing portfolio stability.”

In addition, real estate investments offer the potential for a healthy and consistent cash flow, allowing family offices to generate ongoing revenue to meet their current financial obligations and to fund future investments, she says.

The Goldman Sachs Family Office Insights Report: Eyes on the Horizon notes that, over the next 12 months², family offices are planning to increase their investment exposure to the residential real estate sub-sector by almost 30 per cent, while 30 per cent are looking to maintain those investments. Only 4 per cent plan to decrease their residential holdings. Exposure plans for residential real estate exceed other sub-categories, including industrial (13 per cent increase, 5 per cent decrease); hospitality (12 per cent increase, 4 per cent decrease); office (7 per cent increase, 12 per cent decrease); and retail (4 per cent increase, 10 per cent decrease).

The report points to a particular focus on multifamily residential, which has provided consistently strong rental growth across various market cycles:  “Against an inflationary backdrop, among other cash-generating assets, multifamily is even more appealing given the ability to reset leases.”

Continuing in this vein, Rizk notes that rising interest rates and an undersupply of housing in many North American markets have contributed to enthusiasm for rental income properties.

“We’ve seen interest in various residential properties, including multifamily, as well as commercial properties,” she says. “However, family offices should take a measured approach to identify the types of rental properties in which they’re interested and the geographical areas that present attractive investment opportunities.”

Many family offices are incorporating environmental, social and governance (ESG) factors into their investment decisions and they’re extending that philosophy to their real estate portfolio. Integrating sustainable and ethical practices into real estate investment decisions will help the family office align with stakeholder expectations, Rizk says.

Investing in real estate can also provide tax advantages for family offices. These may include deductible expenses and depreciating the value of income-producing properties to offset rental income, thereby reducing the family’s taxable income and lowering their overall tax liability. Rizk points to the importance of family offices continually updating themselves on the implications of applicable tax laws and related compliance obligations to ensure their investments remain in good standing.

“The long-term appreciation of real estate assets often goes hand in hand with a family office’s philosophy of preserving wealth and generating capital growth,” says Rizk. “On the other hand, family offices must recognize that real estate investments with a long-term investment horizon are typically illiquid and cannot be easily converted to cash. They should ensure they possess sufficient liquidity to address potential cash flow requirements.”

Family offices often need to seek expert guidance to maximize the value and benefits of real estate investments, because they don’t always have the necessary in-house experience. Expert planning allows them to prepare for market downturns and mitigate risk through diversification and financial planning.

“It’s critical for family offices to understand the market cycles and ensure that the real estate firm they partner with follows a disciplined approach to risk management and due diligence for real estate opportunities,” Rizk says. “Partnering with experienced real estate professionals, fund managers or real estate investment firms can provide the necessary knowledge and expertise to ensure family offices are taking the greatest advantage of potentially lucrative market opportunities.”

This story was created by Content Works, Postmedia’s commercial content division, on behalf of RBC Investor Services, which is a member and content provider of this publication.

¹Survey responses collected from March to June, 2022.

²Survey responses collected from January 17 to February 13, 2023.