Luxury Sector: Quarterly Briefing Q1 2016 by Wealth-X
Wealth-X examines the global trends that impacted the ultra wealthy and the luxury sector in the first quarter.
Motivations and behaviors of the luxury consumer
The year began with turmoil in the global stock markets, which could have implications for the purchasing decisions of the ultra wealthy. “The reality is that the volatility and gyrations in the equity market may not have a tremendous impact on the ultra wealthy’s pocket books, but but it does impact them psychologically and emotionally,” Wealth-X President David Friedman said. “If you think about luxury as a category that is driven by passions, interests and emotions, while the market volatility is going to affect how much money they have to spend, the emotional and psychological aspects are the predominant factors in driving what they’re going to do.”
First- and second-generation ultra wealthy individuals have different reactions to loss of wealth. “The first generation believes they can make it back,” Wealth-X CEO Mykolas Rambus said. “The second generation gets extremely concerned about what real or paper loss does to the lifestyle they’ve been accustomed to since birth. It’s like pulling out the rug from under them.”
Winners and losers in luxury
“On the spending side, all indications are that spending may be somewhat constrained (by world stock market losses), but there are winners and losers,” Rambus said. “There are brands that are doing well, based around how and where they are pursuing their customers. To say that Chinese business is drying up is a falsity when looking at some of the numbers out of the UK right now.”
There will be a transition in where spending is happening, rather than a fundamental difference in spending. “We are not going to see a massive correction in luxury spending per se,” Rambus said. “Certain categories may be challenged, but that is related to the products and services themselves.”
Luxury firms should carefully consider their expansion strategies. “Luxury isn’t really luxury when it’s sold everywhere to everyone; it loses exclusivity, and in turn its entwinement with selectiveness,” Winston Chesterfield, Wealth-X Research Director, told CNBC. “When luxury is exclusive, and better yet, recognizably exclusive, it reaches its greatest desirability.”
Brands should tailor their goods — in both design and purpose — to each region they aim to attract. Understanding different natural and social environments will help prestige brands retain their aura of luxury with ultra wealthy consumers.
Luxury as investment
During periods of economic uncertainty, many wealthy individuals in emerging markets seek tangible investments such as paintings (particularly the contemporary, modern and impressionist genres), which will appreciate in value, as opposed to luxury clothing and leather accessories.
The ultra wealthy in the Pacific region have the highest propensity to own luxury assets, according to the recently released Wealth-X Luxury Spending Index.
The index, as cited in the Knight Frank Wealth Report, is based on the proportion of ultra high net worth (UHNW) individuals from each of the principal geographic regions who own at least one of the following luxury assets: yachts, private jets, collectables (fine wine, antiques, art, jewellery and watches) and luxury automobiles worth more than US$100,000. The Luxury Spending Index, which is equally weighted across the four asset classes, compares the likelihood of a UHNW individual from a particular region owning a luxury asset against the global average.
The dominance of the Pacific in luxury spending is largely driven by the proportion of the region’s yacht-owning UHNW individuals, which is more than three times the global average.
Currently, North American UHNW individuals are below the global average for yacht ownership. However, due to the high levels of wealth in the US, Wealth-X expects ownership to increase. Asian UHNW individuals on average tend to have less affinity with the sea, compared to countries in the Pacific and Europe, which is one reason for the lower proportion of Asian UHNW yacht owners.
The index highlights that in Africa, the number of UHNW individuals with a luxury automobile is 1.55 times the global average. Although wealth in Africa is extremely concentrated in certain countries, there is growing potential for luxury brands, including high-end auto marques. Despite ongoing difficult economic conditions in many emerging markets, the appetite of wealthy collectors has not diminished. UHNW individuals in Africa also show a stronger propensity for private jet ownership, at 2.0 times the global average.
Deconstructing the Chinese luxury consumer
The Chinese luxury consumer is experiencing several different cross currents that affect spending. “The Chinese government’s drive against corruption has discouraged more overt displays of luxury, so the Chinese have pulled back in that regard,” Friedman said.
Second, as a result of currency devaluation, the Chinese government has been trying to curb outflows, while the ultra wealthy are trying to move their money out of China. “Luxury real estate in the US, New York in particular, has become the new Swiss bank account for the Chinese,” Friedman said. “They are getting less for their money because of the currency devaluation and the softening of the luxury real estate market, but ultimately, the driving force is to get money out of China and to get it to safety, which is luxury real estate.”
Despite the government’s pressure to curb ostentatious displays of luxury and keep wealth in the country, the Chinese luxury consumer will continue to be a long-term driver of growth, because their purchases are “mapped to a cultural reality,” Friedman added. “In China, you wear your wealth; it’s a cultural mandate that if you’re successful, you should show it.”
Risk in luxury real estate
The larger macro trend is towards more transparency and more risk management around KYC and AML issues, Friedman said: “With more geopolitical instability and increased flight of capital, the more we need a system in place to analyse this.” In particular, Friedman pointed out the EB-5 program in the US, which is fueling a broader, institutional-level investment along luxury assets. “It’s not just ultra wealthy people buying luxury condos in New York for themselves.”
“I don’t see income inequality being a big concern for the ultra wealthy, with the exception of long-term questions of sustainability and legitimacy of wealth in certain geographies,” Rambus said. If wealth inequality grows, then the legitimacy of the wealthiest will be called into question: tax codes will be revised, and elections will shift.
“It’s very ironic that the wealth inequality narrative was starkly highlighted when Mitt Romney ran, but now we have someone who is an actual billionaire, that has not been an issue,” Friedman said. “If you look in relative terms around the world, wealth inequality is so much more acute in other places than in the US. It’s an ongoing philosophical debate about how you can create prosperity more broadly.”
UK luxury sector and the Brexit
All signs point to growth in the UK luxury sector, bolstered by the rise of American tourist sales, according to a recent study by Wealth-X and Walpole, an alliance of 170 of Britain’s most prestigious luxury brands.
London remains the country’s luxury hub, and luxury brands continue to invest in the city. Rapid wealth creation in the North of England, as well as the government’s significant infrastructure investment