UK family offices put their faith in property as political uncertainty grows

Uncertain political winds are blowing through the UK, but family offices are largely unfazed as they look towards long-term real estate investment horizons.

At a recent Family Office Council Real Estate Investment roundtable, single-family offices discussed the impact of the political risks affecting UK investment.  There are two political concerns for investors like family offices, one is obvious and immediate, and that is Brexit, the other is hypothetical, but perhaps a much bigger concern for family offices – the election of a radical left-wing Labour government under Jeremy Corbyn.

The consensus was that, although many are sitting on their hands to await the outcome of Brexit and the prospect of a Labour government, the UK’s fundamentals remain good and family office investments are staying put.

“You have to have a longer-term view rather than seven years,” said one family office CEO who attended the meeting.  Most family offices agreed with this view. Their investment strategies are looking to ride out a “bad Brexit” and a Corbyn-led government.  Indeed, there were grounds for some optimism that there will be some form of “soft Brexit”, a negotiated exit which retains some of the advantages of the single market and customs union.  

Although there was concern about a Corbyn-led government, little scenario planning has been done by family offices

The Swiss bank Credit Suisse, which is the third biggest real estate investment provider in Europe, noted that ongoing Brexit negotiations are having an impact on continental European real estate investment in the UK and on those investors whose guidelines insist that investment must be made into the European Union.  However, there was a consensus in the room that Middle Eastern and Asian investors are less concerned because they are used to political risk and that the trophy asset market for £100 million-plus investment remains strong.

Although there was concern about a Corbyn-led government, little scenario planning has been done by family offices on its impact on property since they felt that it was outside of their control and could not be accurately predicted. At worst there was a feeling that some family members would leave if Corbyn took power but that investments would remain untouched.

There was a worry that Russian clients were suffering from being tainted reputationally by the political fallout of the novichok poisonings early this year in the UK town of Salisbury.  There also remains a widespread belief in UK political and media circles that, despite stringent anti-money laundering regulations and lack of firm evidence, London remains a haven for “dodgy” Russian money.  The changing treatment of Russian oligarch Roman Abromavitch was seen as something of a litmus test for this.

Abromavitch has been feted over many years as owner of the popular football team Chelsea.  But recently he reportedly withdrew an application to renew his investor visa in the UK, instead preferring to sidestep the process by obtaining an Israeli passport which comes with visa-free entry.  His reputation suffered a serious blow when Zurich-based media group Tamedia claimed local police rejected his Swiss residence application over suspicions he might have been involved in money laundering and have contacts to criminal organisations.  Abramovich denies these allegations but the debacle is widely being seen a change of approach to those Russians previously welcomed in the West.

But the mood music on UK real estate investment was still generally positive

Certainly, simply being a foreigner no longer brings the tax advantages it once did in the UK, and the tax regime for local and foreign investors are now broadly equivalent. Nevertheless, trust company Accuro pointed out that trusts are still useful to shelter all worldwide income and gains for those deemed as domiciled in the UK after 15 years of residence.  Trusts can also be used to shelter UK movable assets such as art or classic cars.

There is fear that recent initiatives such as the Unexplained Wealth Order brought in earlier this year, might be misused by a future left-wing government to target the rich.  These orders require individuals to explain the nature and extent of their interest in particular property, and to explain how the property was obtained, where there are reasonable grounds to suspect that the respondent’s known lawfully obtained income would be insufficient to allow the respondent to obtain the property.

Perhaps sensing the UK’s weakness, other European governments have brought forward their own resident non-domiciled tax regimes to attract foreign investors.  Italy now allows foreign taxpayers to pay just €100,000 to cover taxes due on worldwide income, and extends this to family members for an additional €25,000 annually.

Overall it was clear that some UK-based executives focusing on real estate are feeling a bit bored, having being told to hang fire on further buying or development.  

But the mood music on UK real estate investment was still generally positive, and given the market is cyclical the preference is to buy and hold given that fundamentals are sound and the horizon is long term.  Most families don’t want to sell, perhaps ever and given the status of some of the UK’s most successful property dynasties, like the Cadogan family, who own one of the most long-lasting property portfolios in London, you can understand why.

The Family Office Council runs regular roundtables for single-family offices on liquid investments, real estate and governance.  If you are a single-family office and wish to attend contact Keith.j@familyofficecouncil.com