Super-rich take property investment to new level

Money is no object for the super-rich when it comes to buying property in prime locations around the globe, as Elizabeth Pfeuti reports

Have you ever looked at the Hong Kong skyline and selected the apartment you wanted just for the view? Or thrown a party at your hotel overlooking New York’s Central Park because you happened to be in town?

Despite the current austerity-stricken times, there are an increasing number of people falling into the category of high net worth and for them these scenarios are becoming the norm.

Property has always been a favoured asset of the rich, but as technology makes the world ever smaller and wealth is generated outside the traditional well-heeled nations, a selection of real estate markets is heating up.

“People in some emerging markets have built, acquired or sold businesses and they have become much richer,” says Adrian Owen, executive director of UK residential at BNP Paribas Real Estate. “For example, China has opened up, as has Brazil, and the richest people from these burgeoning economies all want to be in ‘global cities’.”

The oxymoron “global cities” covers London, New York, Hong Kong, some large financial centres, and beach locations in Europe and the United States. Investors want to be there and never mind the cost.

In the last two years, $42 billion was spent on property in Europe by investors from outside the region, according to Jones Lang LaSalle. Cross-border transactions made up 45 per cent of all global real estate deals agreed in the last quarter of 2013, the property specialist says.

They want to be close to the action and that means having the right postcode within these global cities

“Appetite is very strong and high-net-worth individuals (HNWIs) continue to invest in both residential and commercial property in areas considered to be relatively risk free,” says Simon Ewing, head of law firm Charles Russell’s London real estate investment team. “These include London, New York, Paris and other capital cities where there is perceived stability, both politically and economically.”

Transparent, open markets have been popular, but as attractive as the legal and regulatory systems are, these investors are picky. They want to be close to the action and that means having the right postcode within these global cities.

As a result, in the 15 months to the end of January 2014, prices per square foot of properties sold on New York’s Upper East Side rose by 32.8 per cent. This contrasts with a 25 per cent rise across the whole city since 2010, according to property monitor and website Trulia.com.

“Affordability doesn’t come into the decision-making process,” says Adam Challis, head of residential research at Jones Lang LaSalle. “While the mainstream housing market looks at multiples of income, HNWIs have more capital than the property they are buying is worth. This means the price is a by-product of the transaction, rather than a determining factor.”

These properties are cash purchases and claims they are pushing up overall house prices in London and other global cities are baseless, argues Mr Challis. “There might be a slight impact, but it is much diluted,” he says. “The behaviour and motivation around the sale is completely different to regular house purchases.”

And despite some eye-watering price tags, most agree prices will continue to rise. Hong Kong has seen prices per square foot dip recently, but experts believe this is a blip due to the market cycle getting out of synch, resulting in oversupply, and the city state will soon be on the up again. There are still plenty of properties listed and selling above the £10-million mark on local property website squarefoot.com.hk.

“When there is fixed supply, the demand will continue to push up the value,” says Mr Challis. “Can it continue to rise? Well, you won’t get many people betting against London.”

“The London property market has moved significantly in the last two years,” says Mr Ewing, “and the competition remains fierce due to the continued lack of supply. But the skyline is awash with cranes that are moving once again resulting in yet more fantastic developments, residential and commercial, coming to the market over the next couple of years, which will undoubtedly be very well received.”

But don’t think these super-rich investors are just capricious magpies, buying up the first shiny building they see.

“This group of investors tends to be very risk averse and in a recent survey cited a ‘steep rise in inflation’ as the greatest fear, “ says Fadi Zaher, head of bonds and currencies at Kleinwort Benson. “Therefore, HNWIs are naturally attracted to both real assets, such as real estate or commodities, which both tend to be highly correlated to inflation.”

Mr Zaher explains the impact of inflation at a couple of per cent per annum: “Taking the current UK inflation rate of 2.8 per cent, the £100 that an investor chooses to ‘preserve’ would retain less than 90 per cent of its purchasing power in five years; this would drop further to 75 per cent over ten years.”

Even for the multi-millionaires, the numbers are significant, so instead of just betting on capital appreciation, some investors want an income from their properties.

Shops on Rodeo Drive, hotels on the Champs Elysees and offices on Berkley Square – high-net-worth investors have become landlord to some of the most iconic brands on the planet. But this market has long been the domain of the larger institutional investor, so have these less nimble financiers been pushed out of the market?

Where institutional investors can hold 5 to 10 per cent of their multi-million portfolios in real estate, according to investment consulting firm Mercer, HNWIs can have anywhere between 20 and 40 per cent of their net worth in property, research from Jones Lang LaSalle shows.

“In residential investment, institutional investors will probably only go to around £750 per square foot, whereas a HNWI will go to £3,000 to secure a luxurious crash pad,” says BNP Paribas’ Mr Owen. “It’s a different approach for a different market.”

The disparity means there are two distinct levels of property forming.

“For institutional investors, the pressing issue is the liability to pay out, whether as a pension fund or an insurance company,” says Mr Challis. “They need very stable income when they hold the asset and, while hoping it increases in value, this is not the overriding reason for buying it.”

The different time horizons, attitude to risk, return aspirations and scale mean there is an opportunity for each type if investor to co-exist, according to Chris Taylor, chief executive of Hermes Real Estate, which manages money on behalf of the BT pension fund and other large investors.

“Institutional capital tends to invest in larger asset sizes than HNWIs and seek the scale pricing premium that is often apparent as well as the illiquidity premium. HNWIs, even super-HNWIs, tend to invest in smaller asset sizes. £20 million is a large amount for a single asset for any HNWI, but for a multi-billion pension scheme it is relatively small.”

However, the constant upturn in prices may hurt HNWIs in the long run, Mr Taylor warns. “Pricing is being pushed higher by the activity of HNWIs in particular asset types, those with perceived safe-haven and low-risk as prime characteristics,” he says. Institutional investors take a wider view of the market and focus upon how to sustain income through the cycle, and Mr Taylor urges HNWIs to do the same.

But as the economy improves, it may be some time before we see multi-millionaires investing with more head than heart.