MAGAZINE: Wealthy private investors boost property holdings

The UK is the most popular investment destination for cross-border private investors, while Asia is the biggest global exporter of capital, Knight Frank's Wealth Report 2019 reveals.

The number of very wealthy people in the world continues to rise, and they are increasing their share of total investment in global commercial property, according to Knight Frank’s Wealth Report 2019.

At the report’s London launch in the show suite of an ultra-prime riverside residential tower at Blackfriars, the firm’s Liam Bailey, global head of research, said that a new ultra-high-net-worth (UHNW) investor ‘is created every hour with the world seeing 43,000 more by 2023’. That will be a 22% increase on the current 198,342 population after 4% growth last year.

The firm does not interview that many individuals for its annual report, but it did talk to around 700 UHNW investors and family offices this time. It found that while the total volume invested in global commercial property has remained relatively flat, at $907 bn (€809 bn) in the 12 months to Q3 2018 (some other agents’ figure is higher), private investors increased their share to $289 bn (€258 bn), or 31%.

Of that $289 bn, $178 bn was spent in the US leaving $111 bn spent on commercial property in other parts of the world.

Private investment in commercial property has been rising since 2010, and 21% said this time that they plan to invest in commercial real estate in another country. Last year Asian private investors overtook US investors as the biggest exporters of capital internationally.

UK commercial real estate is the most popular destination for cross-border transactions by private capital with $8 bn (€7.1 bn) invested in the 12 months to Q3 2018, with the US second (€6.6 bn) and Germany third (€3.6 bn). The Netherlands was fifth and France eighth.

Gateway cities
In Europe, private investors have been active across the market. There have been big prime deals in gateway cities, such as Zara’s founder Amancio Ortega buying the Adelphi office building in central London for £550 mln (€643 mln) from Blackstone via his Ponte Gadea vehicle, and the Reuben Brothers picking up the luxury retail Burlington Arcade in London’s Mayfair for £300 mln.

In Germany last November, Kirkbi, the asset manager of the Lego family Kirk Kristiansen, bought Neue Flora in Hamburg. The 31,000 m2 asset on Stresemannstrasse 161-163 is home to the eponymous theatre plus office and retail space.

William Matthews, Knight Frank’s head of commercial research, said that some private investors ‘will need to move up the risk curve’ to get their desired returns, ‘as a way of tackling the competition - which means taking a more hands on approach.’

He said this would see an increasing focus on income, asset management and development opportunities.

This year, the Qcoon family office paid €36 mln for a Mannheim development site in Germany for 250 apartments and offices for example. London-based family office Flemyn bought the PwC Tower in Rotterdam from Amundi for c€38 mln. The lease to PwC expires in 2025.

Matthews added: ‘Increasingly we are advising our private clients not only on prime office, retail and hotel assets but also strategic investments in growth sectors such as urban logistics, leisure and specialist operating assets including student housing and multi-housing.’

Prime residential
Some 22% of UHNWs want to buy prime residential in 2019 but ‘ironically’ Bailey said, across the globe ‘residential performance has not been strong over the last 12 months. We have seen the lowest level of growth since 2012 at 1.3% overall.’ 

Knight Frank defines an UHNW investor as someone with net assets of $30 mln or more and London is the city with the highest population of them, at 4,944. A fifth of new UHNWs will be created in the US, but Germany is also significant and has more than China. 2019 will be the year the number of US$ millionaires - Knight Frank’s definition of HNW investors - globally exceeds 20 million for the first time.

European cities in top 10 performing markets
The city with the strongest price growth for prime homes and apartments last year was Manila with 11% growth; a contrast with 2017 when it was Guangzhou in China at 27.4%. Europe had three cities in the top 10 performing markets in 2018: Edinburgh (+10.6%), Berlin (+10.5%) and Munich (+10%) all driven by burgeoning rental demand and limited supply.

Some of the most popular gateway cities saw prices fall: New York returned -3%, London -4% while Vancouver was -12%.

Perhaps, Bailey said, the falls signified the end of the ‘everything bubble’ which had seen all hard assets rise in value almost continuously in the low interest rate environment since the financial crisis.

Knight Frank also drew attention to the sharp rise in mortgage costs in the US which is affecting the residential property market there. As a consequence of several interest rate rises by the Federal Reserve, the cost of a $1 mln, interest-only, 75% loan-to-value mortgage has shot up by 69%. Although interest rates remain very low in Europe for now, ‘that is the direction of travel’, Bailey said.

He suggests Berlin, Paris and Madrid, plus Cape Town as the cities likely to see property prices grow the fastest, ‘but growth will probably be capped at 5-7%’.

Governments act to control wealth flows
One new trend picked out by Knight Frank this time is that more governments are reacting to the passage of private wealth into or out of their countries by trying to exert more control.

‘They are either trying to make it easier, like Italy which introduced a €100,000 pa flat rate for taxing income from non-domiciled sources’, said Knight Frank’s global head of residential Andrew Hay, ‘or India where there has been a 144% increase in money flowing from the country’s liberalised remittance scheme’.

By contrast, he continued, ‘others, such as Singapore, Canada, the UK, Australia and New Zealand are putting more tax and regulations in place to try and control who is coming in.’

It is something that has risen up the board in terms of voters’ concerns, perhaps fuelled for example by the publication of the large quantities of private data on investors in tax-havens via the Panama Papers and the Paradise Papers.

For UHNWs seeking wealth preservation,  ‘the greatest luxury in the future may be privacy’, Hay concluded.


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