The Weight Of Money: How Private Investment Is Changing World Real Estate by WealthBriefing
There is little doubt that real estate as an asset class has become more important since the financial crisis. This trend affects high net worth individuals and their advisors, who must unpick the factors driving this and determine how best to position portfolios accordingly.
In this survey by Savills and WealthBriefing, wealth managers were questioned on the issue. Over 90 per cent said that their clients were looking to either increase or maintain their real estate allocations. This was the case across a broad variety of real estate asset types, such as office buildings and residential, and across global regions. So the burgeoning interest in the asset class, which was spawned among private clients in the wake of the global financial crisis, shows no signs of abating and looks set to grow. According to the experts interviewed in this report, this reflects a host of economic and social factors at work.
The climate of the last few years has been one in which identifying the causes of investment movements has been particularly hard: monetary policy has moved in uncharted waters, the global financial system has seen a raft of regulations implemented in quick succession, without pausing to register the effects, and geopolitics have provided a volatile operating landscape. Real estate has proved, in this climate, to be a popular choice, perhaps because it gives a feeling of solidity in a world that is increasingly founded on intangible structures. Indeed, the world’s first financial institution dealing in a purely virtual currency has just received its license in New York1. Such technological trends will inevitably affect the future of real estate too – what types of buildings will be required in a tech-driven world? Where and how will people live and work in that world?
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While such questions cannot be answered definitively, it seems people will always need places to live and work. It seems highly likely they will always desire those places to be conveniently located to facilities, aesthetically pleasing and, increasingly, environmentally friendly.
Therefore, despite a fast-changing world, where disruptive innovation is the norm, real estate is likely to remain a mainstay of the global investment community. And its popularity in this survey shows that high net worth investors will remain a key, and growing, segment of that real estate investment community.
Analysing the picture globally is complex: high net worth investment is channeled through family offices, businesses, asset managers, private banks and other institutions; their capital is not one homogeneous category in the data.
However, by speaking to a large sample of wealth managers for the survey and collecting the views of experts within the high net worth wealth management and property industries, this report aims to give an overview of some of the most interesting themes within HNW property investment today.
The Rising Tide Of Global Capital
In the Savills/WealthBriefing survey, 91 per cent of wealth managers and private bankers said their clients plan to either increase or maintain their direct real estate holdings; 87 per cent said clients plan to increase or maintain indirect holdings. This finding supports a trend that has been present in the last six years across investor types: global capital has flooded into real estate.
“If you look at global investable capital, there is more being invested in real estate today than there has been in the past,” says Craig Hughes, sovereign wealth fund and UK real estate leader at PricewaterhouseCoopers.
Among high net worth investors in particular, real estate has always been popular, says Yolande Barnes, director of world research at Savills. Land and real estate has historically been a key measure of wealth, and is often the first asset that people acquire with surplus capital. “You’ve always had this underlying ‘store of wealth’ function of real estate, it’s always been
there,” says Barnes. “But since the GFC we’ve seen an increasing emphasis on income and property is becoming more important as an income generator.”
Hughes says real estate investment started to increase significantly once interest rates hit the lows they are at today, driving yields down. “If you look at fixed income returns, then you look at something like real estate, and by its nature there’s a real asset backing it, that provides a lot of security. And even the most expensive deals in London will give you 3 per cent – that’s attractive,” he says. There are also inflation hedging and diversification benefits to be considered.
Investment in commercial income-producing real estate hit an inflection point in 2009, according to transaction data from Real Capital Analytics. Real estate suffered heavily in the financial crisis but rebounded more quickly than most would have predicted at the time. Interest rates, on the other hand, continue to languish nearly seven years on.
Zoltan Szelyes, strategies & advisory at Credit Suisse Real Estate Investment Management, agrees the current low-rate environment and corresponding pressure on private investors to “generate decent returns” is driving high demand for real estate.
This has led to intense competition for prime assets. A November 2014 survey of real estate private equity managers by Preqin revealed that over half were finding it more difficult to find attractive opportunities than 12 months earlier.
“There are a lot of people in the market at the moment trying to buy assets, it’s very competitive. Pricing is being pushed up, making it more challenging to find value, and that especially applies to prime assets in the likes of London,” says Andrew Moylan, head of real asset products at Preqin.
At the end of last year, residential prices in the UK capital were 35 per cent above their 2007 (pre-crisis) peak, and had risen 17.8 per cent over 12 months.
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