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Why luxury property is a safe haven for ultra-wealthy family office investors

By James Beech

Family office principals are looking to invest in modern, discreet and well connected luxury residential properties around the world for reliable long-term investments as well as second homes.

Those were among the market trends heard from property, investment and high-end lifestyle specialists when CampdenFB visited The Luxury Property Show in London.

Real estate remained a reliable long-term investment for 73% of families surveyed in The Global Family Office Report 2019. The two most common motivations to invest in particular real estate, beyond returns, were location for 70% of respondents and costs for 50%, Campden Research reported. Consistent with findings last year, 46% of family offices’ average real estate portfolio was residential and 10% of those residential deals were based internationally. Returns for international residential property averaged 6.7%.

“Real estate in general provides a unique opportunity to invest directly,” the Campden report said.

“It offers adequate levels of control (33%) and the ability to diversify their portfolios (30%)."

Globally-minded and connected ultra-high net wealth holders were looking to diversify into different markets, said Tim Davis, Corcoran real estate broker, pictured with Julia Cahill, senior real estate adviser at Corcoran.

Ultra-wealthy individuals wanted a return while at the same time a “safe haven” for investing, Davis said. Their timing for that return was less important to them than the stability of the return and being able to exit the investment in a reasonable amount of time.

“We’re finding that the assets in our markets, the Hamptons and New York, are thought of similarly in that way," he said.

The ultra-high net worth (UHNW) clientele Davis was dealing with in the luxury property market in the Hamptons and New York had changed in the past few years. Russians had been buyers for some time and Asians had entered the market. Within the US, more West Coast and Californian buyers, who made their money in entertainment and financial industries, were becoming interested.

“I have a couple of new clients, one is from Korea and one is from Thailand,” Davis said.

"These are ultra-high net worth individuals and families that are looking to diversify from markets that they are currently into my marketplace to make a long-term investment at the high-end of property development over a three to five year time period."

Modern new-builds in contemporary styles, with big walls of glass to take advantage of the views, were popular. In the vertical market of New York City, luxury buyers were interested in amenities such as parking, health facilities and a concierge service.

The next 12 months will see a shift in the performance of global property markets, as purchasers and investors responded to a more uncertain global economy, a proliferation of market regulation and the rising cost of debt, according to the Knight Frank Wealth Report 2019.

Healthy tenant demand, relative good value and an attractive lifestyle offer would ensure price growth in markets like Paris, Berlin and Madrid comfortably exceeded 5% in 2019.

“Growth at this level is still positive, and well above wage inflation, a traditional benchmark for long term price appreciation, but is marginally down on the level seen in 2018,” Knight Frank reported.

Davis thought economic uncertainty would only go so far in its impact on the luxury property market.

“I think that at some point people start to live with uncertainty and say, ‘You know, I’ve got to move on from that in my mind and take a safe bet with something that is historically sound that ultimately is protected on an exit.”

Vendors said Brexit was a factor in the UK luxury market’s pause, with diminished returns, decreasing prices and fewer building projects. Prices in some neighborhoods fell by as much as 20% since the 2016 referendum.

The Wealth Report Attitudes Survey 2019said 74% of UHNWIs in the Middle East owned second homes outside their country of residence. A greater proportion than ultra-wealth holders in Latin America (65%), Europe (49%), North America (35%) and Asia (17%).

Dubai continued to be popular as it had been over the past 10 years with family office investors from Asia because of its global connectivity to the west, Viran Dattani (pictured), country sales manager—UK at Sobha Realty, told CampdenFB.

But now more European and North African wealth-holders were also attracted to the city for its location, tax benefits, climate and new-build quality. As Dubai matured, more family buyers from the United States and South America were taking an interest.

Dattani said buyers were looking for quality of the build and finish as well as price from their luxury property purchases in Dubai, from canal-facing villas or a small apartment as a holiday home tucked away as an investment. They were looking for long-term investments that would maintain value.

“If you look at any asset class, whether it’s the stock market or commodities, real estate still is the best one,” he said.

“Where you buy it and how you structure it has probably become more important, rather than whether to invest in real estate, it still is the number one asset, it gives you an excellent rate of return over a two to 10 year horizon, so I’m not actually seeing people shying away from real estate, they’re just making smarter decisions within real estate.”

Dattani said buyers not only sought luxury, but also convenience when choosing properties. They wanted services and amenities conveniently onsite with more of a community feel, not an isolated villa. That meant developers having to go the extra mile, from planting specific species of trees to building high quality boutique shops, to incorporating lifts for one-floor villas to make life easier.

Dattani worked with a London-based UHNW family office, originally from Pakistan, which was interested in Sobha’s prime canal plots for bespoke villas. The favorable tax status in Dubai and its transport links through Dubai to Pakistan were attractive to the family office principal.

“They came in and loved the product and the ticket size for that transaction was almost $20 million for a luxury villa,” Dattani said.

“We’re still going through whether they’re going to let out that beautiful place or if they’re going to park that within their fund for capital growth. We see a lot of capital growth if you do buy in the right area in Dubai and that’s what they’re looking at.

“The cost per square foot is a fraction of, say, London or New York and we see Dubai getting to that stage over the next five to 20 years so again it’s a mixture now, yields have come a little bit lower and people are now focused on quality and capital growth.”

Timo Geldnhuys (pictured), Mauritius director at Sotheby’s International Realty said he had not seen a massive downturn in sales of luxury property on the Indian Ocean island nation. His team sold a consistent 400-500 properties a year to foreign buyers and 10-15% were priced above the $2 million mark, but there was no major distinction from $2 million to $10 million villas. Properties ranged in asking price from $700,000 to $14 million. More upmarket developers were moving into the island in response to demand, Geldnhuys said.

Mauritius had a stable jurisdiction, a minor time zone difference and an advantageous tax regime for residents who lived there, which was attractive to family wealth-holders from Europe. It had the virtues of a tropical climate and accessibility for private jets and helicopter transfers. It was considered a more exclusive lifestyle and investment destination when compared with Spain and Portugal. British and French investors from legacy family businesses particularly bought second homes on the island, with interest growing from the United Arab Emirates. Investors were buying luxury property for themselves, not for renting, and for portfolio diversification. They were aware the high-end market was not as liquid as others and were prepared to invest long-term.

“We recently dealt with a representative of a UK family office and subsequently met the family themselves,” Geldenhuys said.

“They were looking for a cluster of modern properties, as opposed to one property; child-friendly, with quarters for domestic help. Obviously privacy and discretion were of the utmost importance. It’s a place where I imagine they would spend four-to-six weeks of a year on maybe two different trips. And because they’re quite a big family, different parts of the family can come out and use this, but it is big enough to host all of them at any given time.

“Their representative came out and had a look, then one of the children, who seems to be quite an influential decision-making member of the family, and now in December the whole family’s coming out. We’ll see how that unwinds and, in most recent times, that’s what we’ve been dealing with.”