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

26 July, 2023

Fred Cassano, Partner, National Real Estate Tax Leader, PwC Canada
Hadielia Yassiri, Partner, Family Enterprise Services, PwC Canada

As large numbers of founders and owners of Canadian family enterprises prepare to retire and exit the business, many are facing big questions about what they do next. Some are exploring various options to sell their companies while others are eager to keep the business in the family by passing it on to the next generation.

While deciding on the right path forward is challenging for all owners who have invested so much in building a legacy, the issues and considerations can be different for founders and leaders in the real estate sector given some of the major trends and developments in the Canadian market.

The complex dynamics of succession in Canadian real estate

What are some of these differences, and what are the implications for the leaders and founders of real estate businesses and the next generation of family members who stand to inherit valuable assets? Explore below to learn about some of the key issues around succession in Canadian real estate and the questions they raise for the transition to the next generation:

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.

Transition strategies key amid market shifts and trends

Working through these issues to establish a transition strategy now is very important as the business environment for the real estate industry continues to shift and evolve. Immediate business pressures, like changing interest rates, shortages of skilled labour and potential liquidity issues in 2024 in some asset classes are further complicating decision making for many real estate company founders and owners. At the same time, the ongoing rise of certain asset classes—like industrial real estate, apartments, retail and hospitality—and the emergence of opportunistic assets like office properties (for the current contrarian), have broadened the range of options available to founders and the next generation of owners.

The current market also includes more options to facilitate partial or full disposition of ownership of real estate assets as Canadian and foreign institutions, including pension and private equity funds, are looking to increase their real estate investments in Canada. This means some families with significant real estate assets may be more likely than in the past to consider selling the business, with many looking closely at the tax advantages that are available under certain deal structures.

Preparing for your defining moment

All of these market shifts and trends highlight the need for company owners and founders to prepare for critical decisions as they face what is no doubt a defining moment for their businesses and their legacies. Given the complex family dynamics at play, a successful transition plan will require strong governance practices for making business decisions at both the ownership and operational level. This will allow owners and their families to better align around the future of the business and undertake the strategic thinking required in today’s challenging economic environment.

What could this look like for your organization? Stay tuned for our next blog, in which we’ll explore some of the best practices around family enterprise governance for Canadian real estate families. And to learn more about how to navigate the future of your business and your family, contact our family enterprise services team today. The family enterprise services team has significant experience working with owners to prepare for a sale or transfer of their businesses and brings deep knowledge of the real estate market trends families need to be aware of as they look to sustain and grow the value of their legacies.

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