Once its biggest fan, family offices are shying away from real estate. Hardly surprising

When demolishing large buildings, developers sometimes use specialist explosive engineers. They place dynamite in the lower structural areas of the building and blow them up, undermining the support structure so the whole thing comes crashing down like an implosion. 

The same things can happen in the financial property markets with less noise and more publicity, but with a similar outcome and more knock-on effects across the sector.

The problem with property investing is that everyone thinks they are experts. After all, it is one of the few asset classes that most people have some experience with, such as buying and selling and mostly making money along the way. 

When the property market is bubbling, everyone has a view, and the view is usually replete with more cliches than a football punter can get into a 30-second quote. It is unsurprising that TV, especially daytime TV, is full of property-related programmes

Often, it is the biggest tax-free capital gain of many people’s lives. I understand that this does not apply to many under 30 years today. But I expect most readers of Family Capital know what I mean.

When the property market is bubbling, everyone has a view, and the view is usually replete with more cliches than a football punter can get into a 30-second quote. It is unsurprising that TV, especially daytime TV, is full of property-related programmes. 

They cover buying new homes, overseas homes, and fixing up derelict homes. There is also the truly ghastly type, which confirms that money and taste are not necessarily correlated, like Buying London. A new Netflix series is where truly over-the-top vulgar properties are sold by what look like truly vulgar and over-the-top narcissistic people. It is a show for voyeuristic viewers only. 

Property is illiquid. This means it’s hard to sell when prices are falling. Even harder to get out of open-ended property investment funds. A sort of oxymoron. Linking an illiquid asset to a semi-liquid fund. When things go down, they can and do end up suspending redemptions, and there remains a huge overflow of waiting redemptions.    However, irrespective of the market valuation, for property you own directly, you can normally get a paying tenant that will provide income while you wait for some hoped-for capital appreciation.

Most people can’t afford to buy property for cash. Whether property funds or individual buyers most borrow money to buy. This is called leverage. Unlike a packet of cigarettes, there is no warning on the back of a mortgage loan “That Leverage Can Kill”. And indeed, it can. 

Investors in the developed world who have invested in office space face multiple challenges. 

Post-Covid, more people work from home. Upgrading old stock is not only very expensive but sometimes impossible because of the previous design. Health and safety can mean that lighting, heating, air conditioning, toilets, access for disabled people, safe places for snowflakes, and bomb shelters for the future either don’t exist or will cost too much to put in place. New York’s Twin Towers were full of asbestos, and many buildings from that era are still there. 

In China, vast overbuilding of residential and get-rich-quick schemes by buying and selling off plans at a premium before a shovel has been placed in the ground came to a shuddering stop last year. Corporate failures to pay off debt (mortgages and similar) have brought the situation to a point of serious peril. 

Most investors got caught by rising interest rates after Covid. Some had fixed mortgages, others did not. Even those with fixed rates were just putting off the inevitable. Eventually, the cost of paying back the debt exceeded the income from the rental. The rental was down as less space was needed, and many office renters needed a rental holiday over Covid. And who said Covid doesn’t make you sick! 

For the Chinese developers, it was even worse. They had no rents as many of the properties hadn’t been finished. Of course, the Chinese government, not being happy with this disaster, temporarily bailed out some of these failures, but only selectively.

One of the other problems with property is the endless fascination with leveraged derivative gimmickry. It can and does kill. 

In the last property crash (2007-2010), the maths geeks in the banks created things called Mortgage-Backed Securities (MBS) and Collateralised Debt Obligations (CDOs). All these abbreviations and occasional acronyms make the insiders sound knowledgeable and dumb to the rest of us.  

Basically, they loaned money to people without money (subprime) to buy properties that they could live in or rent out. This was all based on the theory, mostly true until it was not true, that as property value always rises, the lenders could always repossess the property if the borrowers failed to pay back. 

They then bundled up all these subprime mortgages together, and because there were many of them and the risk was diversified, they persuaded the credit rating agencies (not much persuasion was needed) to give them a high credit rating. 

They even created leveraged versions of such toxic stuff until the markets crashed. Borrowers couldn’t pay back their debts, lenders couldn’t pay back theirs, and there was an almighty market crash. Finally, governments bailed them out. Few bankers ever got fined or imprisoned for this. 

As people’s collective memory fades after 10 years, they have just done it all over again—not as bad as before. It is mostly office-focused in the West and Residential in China, but it is basically a repeat in case you missed it last time. 

The above scenario provides a real opportunity for cash-rich families to find value in the property market. These are the opportunities as I see them.

The emergence of distressed sellers is due to rents no longer covering the cost of their debt. In many cases, when in default, the bank or lender may repossess the property. They then want it off their books, and cany families with cash or great creditworthiness can be the solution.

Building firms short of cash due to escalating costs will do deals to help them finish the projects.

The price may fall in REITS or other indirect property funds. Look especially at the listed and Investment Trust markets, where quoted prices are at a discount, often substantial to the true value of the underlying assets. Do your homework and see if the vulture funds want to buy or break them up.

The government wanting everyone to own a home supported this idea and made the rules very easy to borrow and loan money cheaply and without too much annoying paperwork and awkward questions, like: Do you have an income?  

UK planning laws are notoriously complex, slow, bureaucratic and seem to be run by NIMBYs. However, look at the change of use. There is a market to turn central town offices into living accommodation. Fewer people work in offices today, and the shortage of accommodation is at its worst historically. 

Need meets opportunity. Just be sure it is allowed, read what is involved in the council files, and go and meet (if you can get an appointment) with the planning officer.

If you want to tell your children or grandchildren a horror story before they go to bed, this is always good. 

Once upon a time, a bank lent money to someone to buy a house. It was good for both of them. The bank then said let’s lend money to people buying houses. And they did. Even if they had no idea how they would be paid back. 

The government wanting everyone to own a home supported this idea and made the rules very easy to borrow and loan money cheaply and without too much annoying paperwork and awkward questions, like: Do you have an income?  

Soon, everyone had a home or many homes and a mortgage or several mortgages. Then, the monster called inflation raised its ugly head. The cost of the mortgage repayment went up, and the value of the properties went down, causing a market crash. The government said it was all the fault of the greedy lenders, and the lenders said it was all the fault of the avaricious borrowers. 

All the rules changed, and it became much harder to borrow or lend. So, nobody did. This upset everyone, and the banks persuaded the government to ease the rules and make lending easier and cheaper again. 

After a while, they did. Banks lent, borrowers bought, and prices went up, making everyone happy. Return to the top to find out what happened after. Keep on repeating until the kids are asleep. DO NOT DO THIS IN REAL LIFE. Unless, of course, you did!