While the size of the German family office sector is unclear, it is a significant group with the ability to act quickly that larger institutions often do not have. Ralf Schlautmann reports
You do not hear or read about them often; they rarely, if ever, appear in the public domain. And so it comes as no surprise that you know next to nothing about them. That said, with several hundred billion euros of assets under management the importance of family offices for the real estate market in Germany is immense. The total number of family-owned asset management companies or family services departments of banks probably runs to several thousand. In Germany, there are currently between 250-300 family offices - some market players actually quote a figure of 600-800.
By character, they radically differ from other institutional investors, such as insurance companies, plan sponsors or company pensions. A central characteristic of family offices is that the decision-making processes for an investment are much shorter than with other institutional investors. Family offices are flexible and can respond more swiftly than big institutional investors who are slowed down by investment law regulations and the prescribed procedure involving various supervisory and investment bodies. For instance, acquisition processes of insurance companies require long-winded co-ordination between several specialist departments. Obtaining the approval of the decision-making body takes added time.
So while institutional investors require up to a year for some investment decisions, family offices can decide on a given commitment within days. This means that family offices can seize opportunities that present themselves at short notice and exploit times of crisis to pick up bargains. In certain segments, family offices will therefore enter the picture early on in a given cycle and generate big yield benefits. At the same time, family offices operate with a pronounced sense of security. As a recent study by the Bavarian Financial Centre revealed, the preservation of capital and the avoidance of cluster risks count among the key investment principles practised by family offices. Unsurprisingly, the average asset allocation of family offices is well balanced compared with that of other institutional investors. While insurance companies tend to stock their portfolios mainly with bonds - more than 60% on average - family offices normally allocate only around a quarter of their portfolios to this asset class. More or less the same weighting is given by family offices to equities and real estate investments.
In terms of size, it is hard to gauge the average volume of Germany's family offices. The group of roughly 250 German family offices is simply too heterogeneous. There are family offices with assets worth €3bn. Yet you will also find a number of family offices that manage a fortune of just a few millions. Many of these players have pooled to form multi-family offices, or have their assets managed professionally.
Real estate investments have always played a key role for family offices, accounting for 10-30% of investment portfolios. German insurance companies, by contrast, currently hold about 5% of their investments in real estate - actually with a slight downtrend because of the ramifications of the financial crisis and imminent regulatory changes such as Solvency II.
One reason for the popularity of real estate among family offices is inflation hedging; here in Germany residential real estate plays a dominant role. This is explained not least by the fact that many family offices have built up a historical real estate portfolio that is seen as an heirloom rather than a tradable asset. The properties held may include proprietary production facilities or residential and business buildings in attractive and prominent downtown locations. Such an inventory maintained by family offices that have evolved over time rarely compares to the modern portfolio allocation pursued by insurance companies.
That said, some recently established family offices are exceptions to this rule. The money managed by this latter group may come from the sale of a ‘new economy' type of company or shares held therein. These family offices are hard to distinguish from insurance companies in their investment decisions and the diversification of their purchases. They will, for instance, invest in commercial, logistics or retail in addition to housing - along with equity investments, bonds, commodities or alternative investments.
What nearly all family offices have in common, though, is the comparatively low share of real estate investments outside Germany - rarely if ever higher than 30%, as most family offices lack the necessary experience with foreign real estate. Things are not exactly helped by the fact that prime property London, Paris or New York is simply too pricy for most family offices. Hence, investments abroad tend to take the form of indirect investments.
It remains to be seen how family offices will behave with regard to the upcoming legal changes for Germany's open-ended public funds. The amount that may be withdrawn inside a six-month period will be limited to €30,000 in the future. In times when cash is needed quickly, this might pose a problem, and thus present a knock-out criterion for fund investments. Therefore, chances are that direct investments in Germany (which account for roughly two-thirds of all real estate investments today) will continue to play the lead role.
Ralf Schlautmann is fund manager, Ellwanger & Geiger