There has been huge growth in privately held wealth across the world since 2008. There has also been a shift in how wealthy families manage their investments.
Traditionally, wealthy families would rely on external fund managers and advisors. But a range of factors, including a desire to save on fees, reduce complexity and establish closer control following the financial crisis of 2008, has driven significant growth in the family office sector.
EY estimates that there are more than 10,000 single-family offices alone. Collectively, family offices manage around $4 trillion of assets, according to a report by UBS and Campden Wealth. The report says 17 percent of family office wealth is invested directly in real estate, globally, with figures for European family offices even higher at 23 percent.
When it comes to sourcing real estate finance, family offices want to work with lenders who are in tune with their business needs. Typically, they aim to invest in prime real estate assets, usually no more than 15 years old, in prime locations. These tend to have strong rental income and well-managed, long-term tenants. The overall quality of these assets makes them attractive to lenders.
However, the challenge for lenders is that family offices tend to have more sophisticated requirements when it comes to finance. This is driven by considerations including confidentiality, asset protection, tax mitigation and estate planning.
For example, when a typical investor acquires a real estate asset, they will set up an onshore special purpose vehicle, often with a simple director and shareholding structure. When a family office acquires a real estate asset it will also form an onshore SPV, but the ownership structure is likely to be far more complicated.
One deal we recently advised on was for a cross-border, non-recourse, nine-asset office portfolio refinancing for circa €125 million, with one lender providing the whole loan. Each asset was held in onshore SPV companies in the UK, Germany, the Czech Republic and The Netherlands. The shares in these companies were held by separate offshore SPV corporations across multiple jurisdictions, including the British Virgin Islands, Seychelles, Cayman Islands and Bermuda. Each offshore SPV had professional nominee directors and shareholders with a declaration of trust in each company naming the ultimate beneficial owner as a trust in the Cook Islands.
Many lenders advertise their willingness and ability to finance complex real estate transactions involving offshore ownership structures. However, few have the in-depth knowledge to deliver on the sophisticated requirements of family offices.
Lenders serious about exploring opportunities in this space will almost certainly need to build up their skills and capabilities. They will also need to be prepared to invest extra time and resource, as more complex deals can potentially take many months to complete. The structure of such deals means it is highly likely the lender will need to secure legal opinions for each company across each jurisdiction too. They will also need the expertise to navigate complicated ownership structures. Failure to fully understand an ownership structure could lead to a lender deciding to walk away from perfectly good deals or signing a deal without an adequate security package in place.
Lenders may also need to consider adjustments to their lending criteria to be best placed to secure opportunities. These criteria are often unnecessarily restrictive, and relatively minor changes could significantly expand the number of transactions available to them.
Growth in the family office market looks set to continue. Portfolios are likely to become larger and more diverse. We are also likely to see a continued shift from investment in residential property to the commercial real estate sector. In 2018 the average family office portfolio was split 59 percent to 41 percent in favour of commercial. The commercial proportion is likely to increase as family offices look for better capital growth prospects.
There is an opportunity for lenders to invest time and resources to understanding this fast-growing sector.