Wealth management: Ultra wealthy provide a rich seam of capital for property

Wealthy private investors favour prime property for its security of income, reports Alex Catalano

The wealthy have an affinity for real estate. “They invest first for their own use and then as a financial investment to have exposure in different countries, regions and currencies in the form of a real asset,” says Kwang Meng Quek, Citi Private Bank’s co-head of global real estate. Capgemini estimates that worldwide, high net worth individuals have some $8.1 trillion in various forms of property investments.

At 19%, real estate follows equities  and bonds as their third largest holding, according to the 2011 World Wealth Report from Merrill Lynch and the consultant. The mega-wealthy also seem particularly keen on property. The Citi Private Bank/Knight Frank Wealth Report 2011 shows that real estate accounts for 35% of the assets  of so-called ultra high net worth investors – those worth $100m-plus.

Property is the second most important investment, after their own business. They ranked it 7.3 out of a possible 10, ahead of equities, bonds and other assets (see fig 1 below). They are somewhat keener on residential investments than commercial real estate, and prefer direct ownership to property funds or REITs (see fig 2 below). The wealth management business is booming. Big banks are revamping and expanding their private banking services, trying to meet clients’ interest in real estate.

These ultra wealthy private investors are prepared to spend from £20m-30m to £150-200m on single property deals. “They really have the cash to go,” says Quek. “Many have seen business margins deteriorate, so have shifted money into other forms of investment, like real estate. Asia’s fast-growing economies have been creating millionaires at a faster rate; Asia Pacific now has more high net worth investors than Europe, at 3.3m, with a $10.8 trillion combined wealth (see fig 3).

“Many in South-East Asia made their money in manufacturing or commodities-based businesses, which are huge cash flow generators,” says Quek. “They’re looking for a scarce product with a high liquidity level.” London remains a favoured destination.  Savills estimates that in the past 18 months, private investors have spent £4.9bn on City and West End commercial properties; 80% of them were from overseas (see fig 5).

“Some see London particularly as a safe haven, so there is that capital preservation aspect, and are diversifying out of their home market to a very liquid, transparent market in London,” says Kent Gardner, chief executive of Evans Randall. “Other investors at times chase yield as well.” Paul Forshaw, head of global real estate fund management at HSBC Alternative Investments, a division of HSBC Private Bank, adds: “There’s a move towards stability, not just to London but core US markets as well. When home markets are volatile there’s a wish to invest elsewhere. The vast majority of investors are coming from the Middle East and Asia.

We are also seeing quite a lot of South American and Russian money.”  Paul Cockburn, director of Savills’ central London investment team, says: “They are typically buying good quality assets in well- known locations. We are seeing very strong demand at the moment. A couple of recent flagship City deals have gone to well-known high net worth investors from Hong Kong and Malaysia. “They are looking very much at prime, unlike the residential side, where you find lots of people looking for more value.”

Asian money flows in

Citi Private Bank’s Quek concurs that “we’ve been seeing a lot of Asian money flowing into UK real estate over the past year”, but notes that it has slowed down in recent months because prices have shot up. “These investors have held back and taken a breather. Property prices in Asia are looking a bit toppish, so they are waiting to see which will give first, then they will go in. There is a lot of liquidity in the market.”

Wealthy private investors’ money is also going into the US, Quek says, but his ultra wealthy investors are mainly buying debt attached to buildings. “You are buying something at a deep discount to its market price, irrespective of whether the real estate market is going up or down. The rest of the money is going into Asia for opportunistic development, much of into China, because it continues to grow.

“A lot of investors are quite flush with cash and if they buy, they prefer to own outright, unless they come in with friends.” For wealthy private investors who are diversifying geographically, having a tangible asset is important. “International clients have said: ‘I’d like to have something in bricks and mortar that I can see and touch, and where appropriate generate an income’,” says James Fleming, head of international private banking at Coutts (see below).

But direct ownership has its drawbacks, says Alex Morgan of investment adviser Morgan Capital: “People don’t necessarily realise that owning buildings is quite hard work, especially if they are multi-let or you need to refurbish a couple of floors. Real estate needs someone to be hands-on, otherwise you destroy the value you paid for.”

For this reason, private banks and fund managers are putting together clubs for  wealthy clients. These structures play to high net worth investors’ preference for direct ownership. With the financial crisis, funds fell into disfavour, as investors were put off by their illiquidity, lack of transparency and lack of control.  Clubs and syndicates may not give investors complete discretion, but they know what they are getting. “Investors can look through the deal, know the building, identify the lease terms, tenants and bank finance arrangements,” says Gardner.

“Ultra-high net worth investors like to be aware of the detail rather than being in a blind fund – even more so in this market.  It’s not necessarily so much about control as transparency. They want to know exactly what they are getting involved with.” But for wealthy investors not quite rich enough to afford the multi-million price tags on prime London shops or offices, and for less experienced property investors, funds are still the answer. Private banks and other wealth managers offer a variety of vehicles, from in-house funds or funds-of-funds to third-party ones, while some form special partnerships with third-party fund managers.

“The problem is winning over the private bankers and wealth managers and getting their confidence in the sector,” says Knight Frank Investors partner John Styles. “They tend to control the majority of the money in the middle ground: high net worth investors with between £50,000 and £1m to invest in commercial property.”

KFI works with several private banks. “The biggest hurdle for them is how they get liquidity for clients,” adds Styles. “However much they understand that commercial property should be viewed as a long-term investment and the assets are not immediately tradable, like stocks and shares, they still need to be able adjust clients’ exposure. That’s still the biggest issue for us.”





Coutts pushes investment angle via third-party funds

Coutts, traditionally tagged ‘The Queen’s bank’, is now also the global brand for Royal Bank of Scotland’s wealth management arm and wants to be known less for private banking and more for its investment management. “Property would be one asset class in our overall asset allocation process in an investment portfolio and we would generally access that asset class through third-party funds,” says James Fleming, head of international private banking and offshore.

Coutts is now targeting clients who have between £1m to £75m of investment assets and manages a total of £68bn in assets. “We don’t have in-house funds,” says Alan Higgins, Coutts’ head of UK investment strategy. “We have discretionary, mainly liquid, portfolios through which we invest in the M&G Property Portfolio Fund and the SWIP Property Trust.

“In the discretionary portfolio we look at more mainstream IPD or all-country type funds, to capture the 6.5% yield and maybe a bit of capital growth, but it’s essentially a fixed-income alternative investment.” Coutts also offers bespoke services to invest clients’ money in third-party funds. “We can link up with a partner to introduce a less liquid, lock-up real estate product, which may focus on a higher internal rate of return or, for example, prime, central London property. It depends what’s attractive for our clients and what we see in the market.”

Prime London property is very popular. “Yields are relatively low and it has proved to be a rock-solid investment,” says Higgins. Coutts’ international clients are “very London-centric”, notes Fleming. “Preserving wealth dovetails with diversification.” With the new emphasis on investment,  Coutts will be building up its portfolios of externally managed funds. “We are looking at the possibility of providing our clients with access to an externally managed fund, with Coutts acting as a distributor.”

China and India join growing ranks of the super rich

Wealth is a growing business. Last year, the number of millionaires grew by 8.3%, to 10.9m, while their financial wealth increased by 9.7% to $42.7trn, according to Merrill Lynch/Capgemini’s 2011 Wealth Report. The US, Japan, and Germany have the biggest number of high net worth investors; the UK ranks fifth in the league table of millionaires. However, as other countries’ economies outperform, wealth is spreading globally.

China is now fourth for numbers of high net worth investors, while India entered the top 12 for the first time this year, pushing out Spain. The mega-rich are also expanding at a faster rate. The number of ultra high net worth private investors, who have assets worth at least $30m, grew 10.2% to 103,000 in 2010, while their wealth jumped by 11.5%. Although they only make up about 1% of the world’s rich, they account for 36% of the wealth, a total of $15trn.