The more things change the more they stay the same. Since last year’s Knight Frank research benchmark was released, there’s been feared fiscal cliff and now a sequester in the United States, an increased stamp duty in the UK, more property cooling measures in China amid wobbly economic news and yet another non-majority government in Italy, widely rumoured to be the home of the next Eurozone emergency. Through all that, The Wealth Report 2013 is a repeat performance. If you’re an elite investor, the market all investors keep an eye on, you want to be in New York and London. But there are some other factors to keep an eye on this year.
The Usual Suspects
Those two cities remain the prime destinations for high net worth individuals (HNWI) to work, live, invest and spend leisure time in, but the WR notes that the continuing eastward drift of wealth has put several Asian locations on its Global Cities Survey, the report’s key indicator of where investors are heading. Currently, Singapore and Hong Kong are included on the list, “But in ten years’ time, there will be more Asian cities at the top of that list,” explained Liam Bailey, head of residential research for Knight Frank and one of the report’s authors. By 2023, Shanghai (currently 24) and Beijing (15) are expected to usurp Geneva and Paris.
Investor criteria for concentration of assets still rely on four key metrics: economic activity, political power, quality of life and influence. Interestingly, neither London nor New York scores high marks for investors on the quality of life front, where the top five are Zurich, Melbourne, Sydney, Toronto and Frankfurt. Needless to say, Washington DC, almost a footnote in other areas, sits at the top of the political power list, ahead of Beijing, Brussels Berlin and London.
Other notable details from the report include the fact that Hong Kong’s prime real estate prices grew almost 9 percent in 2012. It’s not the steepest jump in the region — that honour goes to Jakarta with 38 percent — but Hong Kong premium property is now the second most expensive in the world, behind Monaco (averaging almost US$6,000 per square foot at the top end) and ahead of London, Geneva, Paris, Tokyo and Dubai.
The China Factor
Not much of that comes as a surprise to those who watch market patterns, but as Asia continues to amass private wealth and investment pours into the region, Chinese investors’ behaviour in particular will have an impact on the profile of the standard HNWI, with blowback from that influencing many markets outside the top ten.
Other behaviours could potentially affect global markets, chiefly those of new Chinese President Xi Jinping and Premier Li Keqiang and their unity or possible lack thereof. According to Dr Elizabeth Stephens, Head of Credit and Political Risk Analysis at JLT Specialty, as the world’s largest contributor to growth rates, any major upheaval in China will trickle out to the rest of us, and the unprecedented diversity of education and worldview between Xi and Li could make consensus difficult. “The restructuring, or at least rebalancing, of China’s economy has been deferred for a decade, due to the seismic shift involved in reducing dependence on exports and infrastructural investments and stimulating domestic consumption driven growth. This implies handing over more resources to ordinary people, and letting them decide how to spend them, thus reducing the state’s capacity to control the economy. Such a move requires a united leadership willing and able to take risks,” she wrote in the Report. China’s new leadership makes that an unknown.
Conspicuous for its absence from most discussions is India. The perceived BRIC powerhouse everyone expects to be the next big thing and a rival for China’s economic and investor dominance is mentioned infrequently throughout the WR. “2012 was quite a rocky year for India, and there are still quite a lot of issues. It’s still a very, very closed economy and it’s difficult to go in,” begins Nicholas Holt, Asia-Pacific Research Director at Knight Frank. “If I want to buy property in India it’s very, very, very, very difficult if not impossible. There’s a lot of paperwork and a lot of bureaucracy. We’ve seen prime residential markets correlate quite closely to GDP growth, so last year was a bit rocky and the market’s been pretty flat.” For Holt, south Mumbai and parts of New Delhi might sneak onto the investor radar, but India isn’t home to any truly global cities yet. “You could call it a dark horse. There were projections India could overtake China within a generation, though that’s optimistic. There are a lot of structural issues in India, which are holding the country back. But certainly as it reforms there’s a big future for India. Getting things done isn’t always straightforward. That’s one of the problems of democracy.”
Tech Still Tops
That by no means indicates India has fallen out of the spotlight for good, particularly not in light of its tech-strong economy and the Wealth Report’s estimates as to where the so-called smart money is heading — mainly commercial property. Institutional investors are leading the way for now, but the trickle down has started and HNWIs are starting to pay attention. Safe havens like London and recovering locations such as Dublin, Dubai and San Francisco are prime for investment. “Property in a rising economy can provide steady growth to balance against the volatility that equities experience,” said Knight Frank Global Wealth Team’s Deborah Watt.
Also noteworthy are core assets classes like offices and locations with high tech hubs if an investor has the nerve for it. Tech usually means large offices with young, professional staff that force secondary (and lucrative) development to create new districts. “Recent years have seen a rise in the popularity of city centres as places to live and work. Companies are basing offices where young professionals want to be, and this sort of high value worker increasingly favours the vibrant lifestyle of the big city,” theorised Robert Bach, National Director of Market Analytics at Newmark Grubb Knight Frank. “The markets for offices, shops, and leisure property are falling into line with these new trends, leading to a significant change in character for the typical city centre, mirroring European habits of urban living and café culture.” HNWI or heading that way, word is the road is likely to go through London’s Tech City. At least until next year.