It helps to ask a physically fit person on their secrets for staying in shape. Likewise we can look to the rich on how they invest and their views on various asset classes. And it turns out that the wealthy of the world love to invest in property.
Data from real estate research and advisory firm Knight Frank shows that High Networth Individuals (HNIs) globally have a fourth of their wealth invested in their primary residence and secondary homes. They have an additional 10 per cent of their wealth in real estate investments. The investments in real estate sector are overall higher than their investments in equities and bonds.
Private investments in commercial investments are also on an uptrend in the last five years. The amount of investments increased from $54 billion in 2009 to $178 billion in 2015, showing growing interest of HNIs in commercial properties such as office and retail space.
The trend of higher allocation to real estate by HNIs is not new. Over the last decade, 54 per cent of wealth managers said that their clients had increased their allocation to residential property. Nor is this upbeat trend for real estate likely to change anytime soon. About 47 per cent of the respondents said they will increase their allocation to real estate investments in the next ten years. Contrast this with the falling popularity of other ‘real’ assets that have low correlation with the stock market – precious metals. Over 40 per cent of HNIs are likely to decrease their investments in precious metals and only 14 per cent are likely to increase it.
So clearly among non financial assets, property is winning out. But what is the attraction of real estate? About 55 per cent of the ultra rich buy residential property as an investment, something they will sell in the future. It is also seen by half of the rich as a way to diversify investments and also as a safe haven for funds. As part of diversification, there is also an interest in making investments outside their country. The amount of investments into India for instance increased 420 per cent between 2005 and 2014 to $270 billion. In the same period, investments by Indians outside the country increased 738 per cent to $132 billion. Likewise investments out of China increased from a mere $64 billion in 2005 to $1,013 billion in 2015.
What may be some takeaways for property investors? One, property investments – be it in homes or through financial instruments – play an important role in one’s portfolio. And with global opportunities available now, it helps to expand beyond one’s local neighbourhood for value creation, risk reduction and income generation. For example, Vancouver, Canada witnessed 24 per cent increase in property prices in 2015, while Dubai witnessed a 5.5 per cent dip. Diversifying across geographies helps reduce risk and invest in markets where there is value creation.
Two, diversification is important as there are no permanent winners in property markets and preferences switch from time to time. Developed economies were preferred for a period and it moved to emerging economies and now with growth back in the US, the interest is shifting back. Among cities we find there are periods of price appreciation in one market versus other and it helps to either engage with an expert to take the right bet or to spread the investment.