If money makes the world go round, the globe is spinning faster. As the world economies strengthen and markets recover, the international super-rich, who not only survived the recession but also prospered during the economic downturn, are set to enjoy even greater fortunes in the next five years.

With large chunks of that money being invested in top global real estate, their wealth, already changing the shape of the best homes in top cities such as London, New York, Hong Kong and Singapore is expected to exert even greater influence over property markets as the allure of bricks and mortar grows.

A recent report by Wealth-X, a firm that provides intelligence on the ultra-wealthy globally, estimated that 187,380 ultra-high-net-worth international individuals, with assets over $30 million, control a combined fortune of almost $26 trillion. The lion’s share of that wealth — over $18 trillion — is in the hands of an even smaller group of just under 50,000 people worth more than $100 million. But it is those right at the top of the pecking order, the billionaires, that are growing in numbers and wealth. The number of billionaires rose by almost 10% over the past year and their wealth increased by 14%.

“Wealth creation is going into another giant leap,” said Salman Mahdi, Managing Director & Head of Key Clients Relationship Management & Corporate Finance Partnership, Deutsche Bank. “The numbers are huge.” At a round table debate on global wealth hosted by Candy & Candy and attended by Deutsche Bank and Savills, Mahdi explained: “We see global wealth growing by more than 4-4.5% per annum over the next five years. I’m talking about global wealth increasing from say about $122 trillion to $150 trillion.”

Much of that wealth is being generated in emerging markets — from mining in Africa and central Asia to the new tech belt between China and South Korea. Citing the BCG Global Wealth Report 2012, Mahdi said: “If you look at pockets of private wealth creation, Asia is racing ahead at 11% per annum. Russian and Eastern Europe are growing at around 9% per annum as is Latin America.” There is also substantial money coming from Silicon Valley on the west coast of America.

But if new wealth is being made in new growing economies, it is being spent in the “old world” — much of it on tried and tested hard assets such as real estate.

Yolande Barnes, Director, World Research, Savills, traces the trend back to 2008 following the collapse of Lehman Brothers. “We saw a flight from equities and conventional investments towards safe haven assets such as gold and very high quality real estate,” Barnes explained. “In the right jurisdiction, property is seen as a legally safe investment that will still exist in the real world whatever happens in the financial markets.”

Jim Reid, Global Head of Fundamental Credit Strategy, Deutsche Bank, believes that the movement of capital from volatile equities to solid real estate, which gathered pace at the start of the recession, was inadvertently exacerbated by governments’ attempts to prevent economic collapse.

Reid explains that by keeping base rates low in order to prevent economic meltdown, central banks have unintentionally made real estate very attractive to investors. Given the finite number of homes in any property market, high-end house prices have risen during a period when you would normally expect them to fall.

“We have this bizarre situation where capitalism is fiercely making a comeback but sponsored by the state across the world,” said Reid. “The system that failed us in 2008 and 2009 has been brought back to life by interventions from central banks and politicians.”

The effect has been particularly noticeable in London. Figures from Savills show that the cost of a home in prime central London has risen by 25% over the last five years. The UK’s capital also sees more deals on homes worth £100 million ($151 million), than anywhere else in the world. The UK’s stable economy, strong legal system and respected financial institutions such as the London Stock Exchange (LSE) are all part of the attraction. Mahdi said: “The London Stock Exchange is seen today as an unparalleled listing venue for companies specifically in the energy, natural resource and commodity segment. The LSE has a long track record of being able to bring these companies to market.”

Yet beyond the world of finance, lifestyle plays a huge part in drawing people to London. Jonathan Hewlett, Director, Head of London Residential, Savills, said: “I am told by most of my clients that we sit in the best time zone because you can go east and west. This is where UHNWIs want to have their hub office because they can come and go with ease.”

Unlike the overseas investors from previous eras such as the Middle Eastern buyers in the early 1980s or the Hong Kong buyers in the 1990s, many of today’s wealthy foreign purchasers have family in mind. “Security and education play a huge part in the London market. Many people buy in London so that their children can attend schools in the UK,” said Hewlett.

A trophy property in one of the city’s best postcodes is often at the top of the shopping list for wealthy global citizens. Over 30 nationalities have now bought at One Hyde Park, for instance. Nicholas Candy, CEO of Candy & Candy, the interior design house behind the luxury scheme, said: “Whether they are from India, China, Hong Kong, Singapore, Geneva or New York, they all love London. Some of them will rent. Some of them will stay in hotels. But now more and more are buying.”

What they are buying is also diversifying. Following the first wave of buyers seeking security from more turbulent economies and political regimes, there is a trend among the international super-rich who are beginning to look further out of town for investment opportunities. And the decline in value of sterling has served only to increase the attraction of UK homes to foreign buyers. Barnes said: “The super wealthy are now fully invested in conventional safe havens. But there is an increasing interest in yield investment. I detect an appetite in the East for investment for income beyond the kind of purchases we have seen so far.”

Whether the flow of new wealth to the safe haven of London continues is a matter of debate. Concerns are mounting that political talk about increasing taxation on real estate will take the shine off property investment. The UK’s coalition government has already raised stamp duty land tax on properties over £2 million and targeted buyers who purchase properties through a company for tax purposes.

Although tax changes have so far failed to have an impact on the buying habits of UHNWIs, there are fears that manoeuvres by the leading parties will put off investors down the line. The Labour Party’s recent plans to revive the Liberal Democrat’s abandoned “mansion tax” policy, whereby owners of homes worth £2 million plus have to pay an annual levy, has already ruffled feathers. As Hewlett put it: “It’s not a problem at the moment, but it could be the nearer we get to the next general election.”

Yet the UK government is not the only regime seeking to fill its depleted coffers. Buying in London remains attractive compared with many other top cities around the world not only in terms of taxation but also in price. The weakness of sterling has made prime London property look inexpensive in a global context and Savills forecasts that prices in prime central London are set to grow by almost 24% over the next five years.

Candy is optimistic: “You will never go wrong in the long-term if you buy in the best locations. A property doesn’t have to be the biggest but it has to be in the best place.” And the best place so far has been central London.

Taken from
Candy Global Prime Sector Report