While German institutional investors commit only about 5-6% of their investment assets to real estate, the percentage among high-net-worth individuals is four times as high.
According to Knight Frank’s Wealth Report 2013, HNWI have invested no less than $30m or 22% of their wealth in investment-grade real estate. Privately used homes and luxury properties, which nearly all of these people own, are not even included in this figure. For the sake of comparison, the members of this group invest only 8% of their wealth in sovereign bonds, and no more than 15% in equities.
This makes real estate the most popular asset class among the roughly 190,000 wealthiest people on earth. The investment strategy of these extremely affluent private investors differs considerably from that of institutional investors. Above all, it takes a much more global approach. According to a survey by FeriEuro Rating, the real estate commitments of German institutional investors are to 62% limited to Germany, with only 6% in North America, and just 0.6% in Asia. This matches the picture in other countries, where institutional investors seem to prefer to invest domestically as often as not.
HNWI, by contrast, tend to be more cosmopolitan. An astounding 60% of the European HNWI, and all of 67% of the Russian HNWI, are actually thinking about moving their permanent place of residence abroad. This is not least explained by fiscal reasons, as most recently exemplified by the decision of many wealthy French people to leave their native country because of the extreme increase in their tax burden. A majority of the super-rich also let their children go to school in other countries and continents.
It comes as no surprise that the real estate investments of this group show a more international profile. And the trend is accelerating, as far as we can see, especially among wealthy Europeans. At the moment, real estate investments in Germany are highly popular, and justifiably so, because the country offers excellent opportunities combined with a stable economy.
Then again, to invest exclusively in Germany and the European Union would mean that opportunities elsewhere go unexploited.
Keep in mind that the demographics of Europe do not support the long-term assumptions underlying real estate investments. This explains why more and more affluent private real estate investors are shifting their attention to the world’s demographic growth regions. They are most interested in the US, India, Canada, and Turkey. What these countries have in common is a very favourable demographic outlook.
Forecasts suggest that the population of Turkey will increase by 25% between now and 2050, by 36% in India, by 33% in the US, and by 19% in Canada. The same forecasts show the population in the EU contracting by 2.3% over the same time.
It is no secret that demographics are one of the key drivers of the real estate market. Naturally, it is by all means possible to make money by investing in countries with problematic demographics. But in the long run, the profit outlook is brightest in countries where a growing population ensures a steady rise in demand for office, residential, retail and other real estate.
The Knight Frank report goes on to say that HNWI are looking increasingly for investment in real estate projects outside the well-known metropolises. It added that investments in cooperation with local project developers offer the finest opportunities to realise tidy returns. Investing globally, together with local partners on the ground, has become the real estate strategy of choice among high-net-worth individuals.
Professor Lorenz Reibling is chairman and senior partner of Taurus Investment Holdings
