Arguably one of wisest things any of us can do as an individual or rookie investor is follow the veterans. Chances are the world’s investment elite is not going to make too many mistakes. While we can sit back and let them take the real risks, the direction the globe’s ultra high net worth individuals (UHNWIs have US$30 million in investable assets) are heading is the reason to peruse Knight Frank’s annual Wealth Report, released in mid-March.
Moving Up, Moving Out
The 2015 edition of the annual survey has turned up its share of surprises. Among the most crucial trends this year is the rising prominence and influence of socio-political factors that had previously flown below the radar. “Emerging markets and established hubs will continue to lead the wealth growth over the next 10 years. But it’s not all a one-way street,” stated Nicholas Holt, head of research for Asia-Pacific at Knight Frank at the Hong Kong unveiling of the report (the whole report can be read at www.knightfrank.com/wealthreport). “Increasing intervention in many markets around the world, increasingly calls for transparency and calls to know your customer will all have an impact on inflows and therefore property markets.”
Some of the report’s news was to be expected: the greatest growth in affluence for 2014 came in Asia, at 3.5 percent (with Mongolia leading the way with 6.8 percent). Knight Frank’s research found the vast majority of new wealth in the coming decade would come from natural resource-rich locations such as Indonesia, Kazakhstan, Ivory Coast, Tanzania, Ethiopia, Venezuela and Mongolia. But when the report looked at single cities with massive HNWI growth forecast the usual suspects dominated: London, New York, Hong Kong, Singapore and Mumbai.
“They seem unrelated but they very much are related,” stresses Holt later. Issues that the World Economic Forum put at the top of the list for global risk factors that could impact wealth and property markets were largely economic just two years ago — fiscal imbalances, asset bubbles, labour imbalances and so on. This year’s risk survey put geopolitical issues (like instability in Crimea, ISIS, civil war in oil producer Libya) right alongside economic ones. The net result, compounded by a desire to educate children overseas, is increased outbound wealth from Russia, Asia and Africa into Hong Kong, Singapore, the US, Canada, the UK, Australia and the UAE. The one comfort is that no matter the direction, the most popular asset class for investing remains real estate.
The Politics of Property
The patterns are “All pretty much in line with what we expected,” Holt continues. While noting a few oddities, he’s quick to point out most of them can be explained. France is one location experiencing an outward flow of wealth. While it remains a great spot for a second home, the country isn’t particularly conducive to working or even running a business. “London is now the fourth or fifth biggest French city in the world,” quips Holt. Despite its wild market fluctuations since 2008 Dubai is seeing a spike in immigration, largely because it can cater to growing Middle Eastern and north African wealth. 2010’s Arab Spring helped too. And traditional tax haven Switzerland “Has seen outflows due to restrictions on residency, and … extra property taxes. But with the banking sector it’s a bit of a surprise”, Holt says. And demands for transparency — obliqueness being the country’s strong point — could drive investors into Singapore’s open arms.
However, a great deal of the world’s investment activity is now influenced by politics, which begs the question of whether or not markets are now policy driven. “To a certain extent. It’s all about the increasing interventions and real estate is part of that. It’s very sensitive isn’t it?” theorises Holt. “In Australia at the moment all they’re talking about is ‘too many’ Chinese buying and the government is reacting. The same thing happened to Singapore. There is resistance in some of these markets, and so it does make it a bit of a political issue.”
Protectionism is the word of the day right now for international investors; Holt notes that many markets have been protected for years (India, Indonesia, Thailand). “The general trend — general — is more equalisation. The UK has always been quite laissez faire and so many hate the idea of extra taxes. There are just so many taxes involved in the US it’s baffling. Will [property] be more policy driven? Somewhat … In places like Australia you could see more restrictions coming in on foreign buyers,” says Holt. Local affordability is a hot button issue in the UK, Australia, Hong Kong, parts of Canada and Singapore, and in some jurisdictions it could easily become election campaign fodder (UK, Singapore). Protectionist policy will be felt more if interest rates rise and money stops chasing property.
“There’s a general feeling that the recovery seems to have benefitted certain people more than others. There’s been picketing and riots and so on, and calls for more wealth taxes,” Holt finishes. The US is flirting with wealth taxes aimed at property, they already exist in France, and a mansion tax could be in the cards in London. “It’s interesting and there is a political element to it all. This could influence some of these flows that we’re seeing. People are more comfortable buying in other countries than they’ve ever been before. They’re moving around and immigrating and sending the kids to school and suddenly policy makers are saying, ‘Hold on.’ So that’s the break. We have yet to see how this shakes out.”