In a recent article from CampdenFO, Delegate Managing Partner Andy Hart weighs in on strategies family offices can take to diversify their real estate investments. Ultra high net worth families have a long history of including residential properties in portfolios, and most of these investments are trophy properties in first-tier cities like New York and London. But family offices should be cautious, Hart warns, and take steps to tweak their real estate portfolios for greater diversification.
Because of worry centered on global growth relative to China, Hart explains that the real estate market might not be as stable as one might imagine. “Core real estate also has a relatively low yield at the moment and we’re not attracted to it because of rising interest rates. There are simply other assets that are better able to produce higher risk-adjusted returns,” he says. A pullback in the US oil and gas industry is also likely to have an impact on the real estate market.
Hart advises clients to be “patient and opportunistic” when considering real estate investments. By focusing more on Class-C properties and second- or third-tier cities, investors can avoid overpriced top-tier markets. Now that the economy is starting to recover from the global financial crisis, these lower-tier cities are showing opportunity for stronger growth due to the lower cost of entry. Even with this advice, Hart believes real estate will continue to be an attractive asset for family offices in the U.S. because of its tax advantages. With the right succession planning, families have an opportunity to greatly reduce or eliminate capital gains taxes entirely relative to their real estate holdings.