The great wealth transfer is underway: What does this mean for Canada’s family-owned real estate companies?

Exponential increase in the value of real estate assets

The growth of Canada’s real estate market has led to a significant rise in the number of next generation billionaire families. This means that the transition of value to the next generation carries a number of implications for families.

These include tax, governance and future funding considerations for taxes due on death and potential transfers or exits. Real estate families may not have expected such large tax bills to be coming due and will need to consider how to pay for them in light of assets that may not be easy to sell.

Long time horizons

Due to factors like economic risks, multiple stakeholder inputs and public policy considerations, planning for real estate developments involves forecasting that spans decades. Decisions made today by current owners of assets will have significant impacts by the time the next generation inherits or is involved in the business. This makes it especially important to include the next generation in planning for the future.

Differing views on leverage

The next generation may have a bigger appetite for debt given the era of very low interest rates that they’ve lived through for the past two decades. The current owners likely have a different perspective, having witnessed the consequences of real estate foreclosures during periods of higher interest rates in the past when it was difficult to sell assets. Those who have experienced high-interest periods may be more hesitant about debt-fuelled growth, which can lead to tension around an organization’s long-term strategy.

Generational divides on ESG

We’re also seeing different views on environmental, social and governance (ESG) matters, with the next generation of owners and leaders typically more willing to invest in retrofitting buildings, adopting geothermal systems, measures to reduce greenhouse gas emissions and other sustainability initiatives. The next generation may also show more interest in addressing housing affordability and building more complete communities encompassing parks, amenities, educational programs and more diverse retail offerings in light of rising awareness of social issues and real estate companies’ track records on them.

These divides also often come down to the time horizon being looked at. The next generation tends to believe in investing in ESG performance because it will provide a return on investment in the future. The current generation often views ESG spending as inflationary with little to no immediate return.

Aligning on the pace of technology investment and adoption

Technology continues to open up new opportunities for the industry, with tools aimed at streamlining processes, coordinating building activities, monitoring operations across real estate portfolios and predictive data analytics that inform financial proformas among the solutions being embraced by Canadian real estate companies. But with company founders typically less focused on the role of technology in real estate, it’s often the next generation who’s more open to digital solutions and tends to drive these types of opportunities to increase energy efficiencies, improve customer and tenant experience and enhance growth and resilience using predictive data analytics. As the next generation prepares to take on a bigger role in the company, it will be important for them and company founders to align on the pace of technology investment and adoption in the business.

Developing strategies around digital transformation will be key as technological changes and disruptions continue to emerge. While the COVID-19 pandemic accelerated digital adoption in an industry that had been relatively slow to invest in this area, the rapid rise of generative artificial intelligence will open up even more use cases to infuse technology into real estate companies. This is an important area where the next generation can play a significant role in helping the family business get an edge through new opportunities to enhance efficiencies, improve data analysis and governance and protect against cyber crime.

Managing diverging perceptions on roles, responsibilities and involvement in the business

The next generation may have different views from company founders on their role in the business. Future leaders may, for example, have little interest in the company’s operations but might still expect to have input into decisions about the ownership and strategy of the business. In other cases, they may be a passive investor expecting after-tax annual distributions.

While defining the next generation’s involvement is important, families also need to address and prevent diverging perceptions around roles and responsibilities more broadly, as well as compensation, corporate distributions, sharing of information and other matters.