Global: Property Implications as the Band of Rich and Super-Rich Grows Bigger

Global: Property Implications as the Band of Rich and Super-Rich Grows Bigger

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CapgeminiMerrill LynchAccording to the Merrill Lynch/Cap Gemini 2007 Annual Wealth Report the aggregate wealth of the world’s wealthy people rose 11.4% to $37.4 trillion in 2006. These are the total holdings of those with investable assets of over $1m (high net worth individuals – HNWIs).

The report puts their number at 9.5 million with about 95,000 of them having holdings of over $30m (the Ultra-HNWIs). Interestingly, Singapore and India are at the top of the table in terms of increases in numbers, posting 21.2% and 20.5% gains respectively. In the case of Singapore’s property market it would be interesting to know ow many of 67,000 HNWIs are Singapore nationals and how many are merely domiciled there.

In real estate terms the most interesting finding (www.ml.com/media/79882.pdf ) is that, firstly, 2006 saw a marked trend away from alternative investments towards property. Included within the ‘alternative’ class of assets are hedge funds, commodities, currencies, derivatives and private equity. Secondly, the wealth report is expecting property to lose some of its popularity in 2008 (it has less to say about 2007 but REITs are expected to continue in popularity in the short-term).

During 2006 the value of direct real estate transactions rose 35% to $682bn while total real estate investment for the year reached $900bn, a record. These figures would suggest that worldwide property speculation is not ballooning out of all proportion to actual use or enjoyment of properties.

The wealth report makes the important point that almost half of the property holdings of HNWIs are for their personal use (remembering that the survey excludes first homes) and that these investments tend to be made without recourse to borrowing and are embarked upon for personal family reasons rather than investment ones. Therefore, this class of property is less prone to the effects of interest rate increases or a decline in the demand for property.

The report’s analysis of the figures for alternative investments highlights hedge funds as a particular class of investment that lost popularity in 2006 as volatility in the markets was lower than in previous years. Private equity investments, while classed as ‘alternative’ investment, grew in absolute terms to $432bn but the report says that current interest in private equity is being driven by institutional investors. Important trends highlighted by the report include the decline in domestic investment by US HNWIs and the increase in real estate investments by them (see above).

However, the buoyancy of the commercial property sector in the US means that there are still attractions to that market (vacancy rates for office properties are their lowest sinceQ3 2001).

As well as being an important investment for the country’s wealthy, commercial property may be the best indicator of any domino effect from the problems of the US housing market. The April report for the Federal Rserve Board said that new York office rentals were up by 20 to 30% from the same time of year in 2006. Rents are also rising in northern New Jersey and on Long Island. Meanwhile property prices at the higher end (upwards of $1.5m) have languished in New Jersey while apartment accommodation in NYC has merely marked time.

For New England residential property volumes were up but prices were slightly down. In the Midwest, where the house price problems seem somewhat more serious, the commercial market experienced little change in occupancy rates or rentals over the first quarter of the year. In the San Francisco area the picture was one of problems with residential real estate but slowly increasing demand for commercial property.

The Merrill Lynch/Cap Gemini report’s most important commentary is on the need for more dynamic,
focused investment advice for HNWIs. However, their analysis of the challenge and opportunities for financial advisers and private wealth managers does not offer any clues as to the way forward for property professionals.