Speaker 1:
This is The Real Pulse, a podcast series where RBC Capital Markets experts share their insights on the latest trends and opportunities in commercial real estate.
Nurit Altman:
Welcome to The Real Pulse. I'm your host, Nurit Altman. Family offices saw their wealth grow during the pandemic, and with more capital to deploy, we are seeing private investors and family offices play an increasingly important role in the real estate market here in Canada and abroad. But with each family office comes a unique strategy and a unique approach to real estate investing, which can make it a challenge to predict where their interest will lie in this rapidly changing market environment. Today I am joined by Mark Fell, Head, Family Office and Strategic Clients, Enterprise Strategic Client Group at RBC, who will share with us how family offices are thinking about real estate in 2022. Mark, thanks for joining us.
Mark Fell:
Thank you, Nurit. It's a pleasure to be here today.
Nurit Altman:
Mark, your team published the North American Family Office Report for 2021, which provides some fascinating insights into the family office space. One incredible statistic states that 86% of family offices saw their wealth increase last year and 20% saw it rise significantly, all during a global health crisis. With these tremendous levels of growth, where are family offices planning to deploy capital in 2022?
Mark Fell:
I should begin by saying that RBC partnered with Campden Wealth to produce the report you just mentioned, where we surveyed 179 North American family offices across a huge range of topics to create what I believe is the most comprehensive report of the global family office industry. Indeed, as you highlighted, family offices had a very strong run this past year. Needless to say, a fair bit has changed in the market since then. However, family offices did accurately forecast rising inflation in interest rates, but the war in the Ukraine, and additional waves of COVID, were not factored in. Still, with a growth mindset, about half of North American family offices identified they were seeking new investment priorities for 2022, and I believe they're very much executing to plan.
Mark Fell:
The most popular areas identified for investment included healthcare, biotech, fintech, and AI. I would also add in renewable energy or carbon emission reduction related investments, which continue to be favored. It's worth noting that from an overall asset allocation perspective, on average, family offices have a meaningful third of their portfolios in equities, 15% in fixed income, and a notable 50% in the broader alternative space. Real estate and private equity direct investments were a good 25% of the North American family office investment portfolio last year.
Nurit Altman:
So, Mark, with that as a backdrop, I wanted to dig into real estate a little bit more specifically. How do the family offices you speak to think about real estate as an investment class? And in a rising interest rate environment, does this remain an asset class of interest?
Mark Fell:
Nurit, you'll find that family offices are very attracted to the real estate sector. In fact, both with real estate direct investments, and as part of real estate funds. On average, I'd say 15% of US family office portfolios hold real estate. But interestingly, in the Canadian addendum of our report, we found that Canadian family offices have almost double, with about 28% of their portfolios being real estate oriented. As mentioned, rising interest rates were very much on the minds of many in the family office space, as it was second only to inflation in the ranking of most significant market risk for the coming year.
Mark Fell:
What is also interesting is that North American family offices, as a whole, rated real estate overvaluation as the third highest market risk. Nevertheless, we asked family offices about their outlook for real estate and found that only about 6% expected to decrease their real estate direct investments. I think this reaffirms that family offices take a long-term and patient approach to their investment strategy. In fact, despite many family offices recognizing a rising rate environment, over a third surveyed expected to increase their position in real estate direct investments this year.
Nurit Altman:
Well, one of those families went big in the Canadian market this year. So the largest real estate transaction this year, and one of the largest single asset sales in Canadian history, is the sale of Royal Bank Plaza where you and I both sit today. This property of over $1 billion was sold to a European family office. Of all the places in the world they could invest, they chose Canada, and they chose Toronto. Do you see this as a bellwether of things to come in the family office space, and how are other family offices thinking about Canada as an investment market?
Mark Fell:
It's really very interesting, and was reaffirmed once again in our report, that North Americans, and even sophisticated North American family offices, continue to have a bias towards their own markets. Over two-thirds of those surveyed allocate between only zero to 20% of their portfolios to foreign markets. So this compares to two-thirds of European family offices, which do the opposite and invest outside their home market.
Mark Fell:
In fact, for this year, 45% of European family offices expected to increase their investments in North America. Our team sees quite a number of European family offices being specifically drawn to Canadian real estate, ranging from major parcels of farmland through to residential and, of course, significant commercial real estate assets.
Mark Fell:
The investment horizon, I'd say, for European family offices in particular is incredibly long. Many of these families plan remarkably at least seven generations, or have at least a 100-year outlook. I expect you will see more landmark real estate assets being picked up by other families along the lines of what Zara founder and owner, Amancio Ortega, did in his acquisition of RBC Plaza via his Pontegadea family office.
Nurit Altman:
Mark, your report noted succession planning as a key challenge in the family office space. How does real estate fit into succession planning for a family office, and is this an asset class of interest for the next generation?
Mark Fell:
I think there are a couple of different ways to look at real estate and the role the next generation wants to play. Sometimes the family's core operating business is in real estate and there are a number of NextGen generation that want to take an active role with the family business. I can think of a number of situations like this. But sometimes however the family's core operating business is in something unrelated to real estate industry, but the next generation wants to take an active position in real estate and take a meaningful role in deploying family capital into the broader real estate sector. There's certainly lots of examples like this as well.
Mark Fell:
Even if the family doesn't have a heavy investment in real estate, there are other aspects of real estate that the family must deal with in succession, and this can often be quite emotional as assets that are meaningful to the families, such as a cottage or family vacation estate or compound, are planned for in succession. In fact, 88% of family offices in North America own residential homes and apartments or residential estates.
Mark Fell:
You know, in all cases, family offices are actively managing real estate as it's a primary part of the portfolio. And in many cases, the assets will pass from generation to generation, especially given the long-term planning horizon family offices, and certainly their exceptionally wealthy families, often take.
Nurit Altman:
Mark, thank you for that. Your insights into the family office space have been fascinating. We appreciate your time today.
Mark Fell:
Oh, thanks very much, Nurit. Thanks for having me.
Nurit Altman:
I'm Nurit Altman, and this is The Real Pulse.
Speaker 1:
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