Wealthy investors are hot on property

Wealthy investors are once again eyeing property markets, according to the latest report by Barclays Wealth and the Economist Intelligence Unit (EIU) titled Prospects for Property: On Solid Foundations?

More than 2,000 global high-net-worth individuals with investable assets ranging from £500,000 ($826,000) to £30 million were surveyed. The results showed that wealthy investors in nine out of 10 markets plan to cautiously increase their allocation to real estate during the next two years, by one to four percentage points, with almost half (49%) expecting to see an increase in the value of their property portfolios within this timeframe.

Sixty-four percent of Hong Kong respondents currently have 5% to 30% of their investment portfolios allocated to property, while 17% have 35% to 50% in property. The latter is expected to rise to 21% during the next two years.

"The current environment offers considerable promise to investors and this is reflected in the guarded optimism among high-net-worth investors," said Joanna Chu, managing director and head of North Asia at Barclays Wealth. "As investors add to their property portfolios, they should be highly selectively with their choice of property investments. Managing risk will continue to be important. Investors will be wise to maintain a diversified property portfolio and consider options in overseas markets, property funds and even commercial property."

Of all the high-net-worth investors polled, perhaps reflecting the relatively small size of their domestic markets, Hong Kong and Singapore respondents have the most international outlook. Hong Kong investors already have 47% of their most significant property investments committed overseas while Singapore investors have 40% invested overseas. All other investors polled continue to have the majority of their significant property investments within their respective domestic markets.

With property prices in some major developed countries showing signs of stabilising, Hong Kong investors anticipate the US property market to offer the most attractive returns during the next two years (17%), followed by the UK (14%) and China (13%). Other markets cited by Hong Kong investors include Taiwan, Macau, and Canada.

The rationale for property investments is not always rational

According to the report, 35% of global respondents plan to increase their allocations to property over the next two years, 48% will maintain their current investments and 17% will decrease their allocation. The reason most widely cited by high-net-worth investors for the increase in allocation is that property offers better long-term prospects than other asset classes. Similarly, investors across all markets feel that the potential for income through rental is the most attractive factor in having property investments, with 52% of Hong Kong investors holding this view about residential property and 30% about commercial property. Surprisingly, investing in property for capital gains does not seem to be a high priority  

Interestingly, close to half (46%) of Hong Kong investors do not believe that real estate investments are likely to outperform equities in the next 10 years and 45% do not think that real estate is less risky than equities. This suggests continuing uncertainty about the trajectory of financial assets and a desire for portfolio diversification, especially after the turmoil of the financial crisis.

The survey and interviews with high-level property experts reveal that while it is tempting to regard property as a straightforward investment as it may not have the financial complexity of derivatives or some hedge funds, it is by no means simple. Emotional attachment can get in the way of sound decision making, particularly with residential property. Some industry experts point out that wealthy investors can often have property portfolios with an unhealthy concentration in one or two prestige properties, which account for a large proportion of their wealth.

"For many, investing in property is much more than a pure financial decision, particularly with residential property," said Chua. "Often, the emotional relationship with a property impacts the way investors deal with the property. When you are investing with financial goals in mind, you must take an objective view."

Of the various property categories, residential property is the most popular and familiar to investors. Commercial property plays an important role with wealthier investors, particularly those possessing investable assets of over £30 million. Seventy percent of wealthy investors in this band have some exposure to direct commercial property investments.

The growth of indirect property investments such as property funds or real estate investment trusts (Reits) allow investors to achieve diversification across multiple types of property and locations with smaller investments and to gain access to the expertise of specialist managers. Surprisingly, the survey found that the wealthiest respondents, who in theory are most able to make direct investments in commercial property, are also the most likely to invest indirectly. Close to 45% of respondents with investable assets in excess of £30 million hold indirect investments, while 26% of respondents with £500,000 to £1 million invest indirectly.

"The survey found that Hong Kong high-net-worth investors are looking for income rather than capital appreciation," said Manpreet Gill, Asia strategist at Barclays Wealth. "This is interesting as it is somewhat different from what property investors elsewhere are looking for from their investments. But it is consistent with the fact that liquidity remains flush in Hong Kong, while interest rates remain low, making property attractive even if only from a simple yield perspective. This is likely to continue as long as rates remain low."

Gill added: "The survey reveals that, much like investors outside of the region, Asian investors are holding a much higher proportion of their wealth in property than we would normally recommend. However, the fact that Hong Kong investors have a greater propensity to invest outside Hong Kong is a positive development because diversifying that risk is very important and helps avoid excessively concentrating risk in one asset class and region together. These findings are also consistent with our view that while we would expect Hong Kong real estate in general to provide reasonable positive returns over a long period of time, evidence suggests that real estate as an asset class tends to provide lower rates of return over a long period of time as compared to an asset class like equities."