For corporate executives and wealthy individuals, how to protect the assets they have built up and smoothly pass them on to the next generation is an extremely important management issue, as is the success of the business itself. How to achieve lasting prosperity that looks 10, 50, or even 100 years into the future, rather than being swayed by short-term market fluctuations? One solution to this grand question lies in the family office system.
A family office is a specialized organization that goes beyond mere asset management to provide comprehensive support for the preservation, management, and succession of assets across generations, integrating the values and vision of the family. Among their diverse investment portfolios, real estate is an asset that has been historically important and whose value has been reaffirmed in recent years. In this article, we will delve deeper into the strategic reasons why family offices around the world are emphasizing real estate investments, along with data to help high-net-worth individuals successfully defend their assets and pass on their businesses.
What is a Family Office? A role that goes beyond mere asset management
A family office is a private organization established to comprehensively manage and control the assets of a particular family. Its main purpose is to "protect, increase, and smoothly pass on" the family's assets to the next generation. Unlike private banks, which often specialize in the management of financial assets, or asset management companies, whose main purpose is to manage individual properties, family offices play a broader role.
Specifically, in addition to the management and operation of financial assets and real estate, their activities include inheritance and business succession planning, tax and legal strategies, philanthropic support, and even the transfer of intangible assets such as education and shared values of the family. It can truly be said that they serve as a "command post" that supports the family's enduring prosperity.
| Family Office | Private Bank | Asset Management Company | |
|---|---|---|---|
| Main objectives | Preservation, management and succession of the family's overall assets and values | Management and administration of financial assets | Management and administration of mainly real estate assets, tax reduction |
| Scope of services | Comprehensive (financial, real estate, tax, legal, educational, philanthropic, etc.) | Mainly financial services | Mainly real estate related services |
| Target Clients | Specific families only | Large number of high net worth clients | Real estate owners |
| Independence | High (family interests are the highest priority) | A division of a financial institution, potential for conflict of interest | May be independent or parent-subsidiary |
Global Trends in Data: Family Office Asset Portfolios
Family office investment strategies tend to be extremely long-term and diversified. Let's take a look at where real estate fits into this picture.
Seven Strategic Reasons Why Family Offices Place a High Priority on Real Estate Investments
So why do family offices place such a high priority on real estate? The reason is that the multifaceted nature of real estate is perfectly aligned with the long-term goals of family offices: preserving, managing, and passing on assets. The following are seven strategic reasons.
1. Asset Preservation and Inflation Hedge
Unlike paper assets such as stocks and bonds, real estate is a physical asset with physical substance such as land and buildings. This nature provides a powerful asset protection function, as its value is unlikely to drop to zero in the event of financial market turmoil or an unexpected economic crisis. Furthermore, real estate is extremely effective as an inflation hedge. During inflationary periods when prices rise, real estate prices and rents tend to rise as well, thus preventing a diminution in the real value of assets.
2. Generation of stable cash flow
Real estate for rent generates stable and continuous rental income as long as there are tenants. This cash flow can be used for the family's living expenses, business working capital, or as a source of funds for new investments, thereby stabilizing the financial base of the family office. In particular, by selecting properties with good location and quality, vacancy risk can be minimized and predictable income can be secured over the long term.
3. Portfolio Diversification Effect
Price movements in the real estate market have a relatively low correlation with the stock and bond markets. Therefore, incorporating real estate into an asset portfolio is an effective diversification strategy that reduces overall risk. Even during periods of poor performance in one market, the stable income from real estate will support the entire portfolio and prevent significant declines in asset values.
4. Trans-generational asset succession
Real estate, by virtue of its physical presence, can be an asset that symbolizes a family's history and values. Properly managed real estate can be passed on from generation to generation and serve as the foundation for the family's lasting prosperity. In addition, in the event of inheritance, real estate can be strategically used to realize smooth asset succession, as it has the potential to reduce the assessed value for inheritance tax purposes compared to cash deposits or listed stocks.
5. Tax Strategic Advantages
Real estate investment has the potential to offer various tax advantages. In particular, depreciation of buildings is an accounting expense that does not involve actual cash outflows, and by deducting this expense from other income, it can be expected to reduce income and inhabitant tax burdens. This has extremely effective tax benefits for wealthy individuals subject to high income tax rates.
| Item | Description | Expected Effect |
|---|---|---|
| Depreciation | A mechanism for recording the acquisition cost of a building or other asset as an expense over its useful life. | Reduction of income and inhabitant taxes by creating a deficit on the books and adjusting it against other surplus income, such as employment income. |
| Reduction of inheritance tax assessed value | The assessed value of real estate at the time of inheritance tax calculation generally tends to be lower than its market value. | This may reduce the inheritance tax burden compared to inheritance in cash. |
| Use of asset management companies | Own and manage real estate as a corporation rather than as an individual. | Lower tax rates due to income diversification, expanded scope of expense recognition, simplified inheritance procedures, etc. |
6. Leverage Effect
In real estate investment, "leverage" is possible, whereby borrowings from financial institutions are used to make investments on a scale larger than one's own funds. Appropriate use of leverage under low interest rate conditions can dramatically increase investment efficiency. Family offices can raise funds on favorable terms backed by their creditworthiness, and develop strategies that take full advantage of this leverage effect.
7. Privacy and Control
Most real estate transactions are conducted on a relative basis, not on the open market like listed stocks. This allows for a high degree of privacy regarding the family's investment strategy and asset status. In addition, because real estate allows the owners to be directly involved in the management and operation of the property, they can maintain a high degree of control over their investments, which is a major attraction for family offices that value autonomous decision-making.
Conclusion: Real Estate is the Cornerstone of Family Office Permanence
This article has explained the background and strategic reasons why family offices emphasize real estate investments. Real estate is not just a source of income, but an asset class with unparalleled characteristics that contribute to virtually all of the long-term goals pursued by family offices: asset preservation, inflation hedging, stable cash flow, portfolio diversification, and smooth intergenerational succession.
In particular, the recent rise in geopolitical risk and economic uncertainty have underscored its value. The fact that the world's ultra-high-net-worth individuals are once again returning to the "unshakable value" of real estate should be instructive for all executives and wealthy individuals.
Reevaluating the role of real estate in one's asset portfolio and strategically incorporating it into the family's assets and business for lasting prosperity is now an essential business decision. We hope this article will help you build a long-term asset strategy.
INA&Associates Inc. offers tailor-made real estate investment strategies tailored to the circumstances of each of our ultra-high-net-worth clients. From assisting in the establishment of a family office, to the selection of specific properties, to the use of an asset management company, we support our clients in building their valuable assets based on our professional expertise. Please feel free to contact us.
Frequently Asked Questions (Q&A)
- Q1. How much assets do I need to establish a family office?
- A1. Generally speaking, one standard is to have assets under management of 10 billion yen or more, but in recent years, smaller family offices have been increasing. What is more important than the amount of assets itself is a clear intention and plan to pass on assets from generation to generation.
- Q2. What are the risks involved in real estate investment?
- A2. The main risks include vacancy risk, falling rent risk, rising interest rates, disaster risk, and liquidity risk (the possibility of not being able to sell immediately when you want to). In order to minimize these risks, detailed property surveys and diversified investments by professionals are essential.
- Q3. How should I consider investing in overseas real estate?
- A3. Overseas real estate has advantages such as geographical diversification from domestic assets and investment opportunities in markets with high growth potential. On the other hand, foreign exchange risks and expertise in local legal systems, taxation, and business practices are required, so working with a reliable partner is the key to success.
Daisuke Inazawa
Representative Director of INA&Associates Inc. Based in Osaka, Tokyo, and Kanagawa, he is engaged in real estate sales, leasing, and management. He provides services based on his extensive experience in the real estate industry. Based on the philosophy that “human resources are a company's most important asset,” he places great importance on human resource development. He continues to take on the challenge of creating sustainable corporate value.
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