Friday 29 Mar 2024
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This article first appeared in City & Country, The Edge Malaysia Weekly on March 14, 2022 - March 20, 2022

Prime real estate is expected to thrive this year. There will also be opportunities in the ESG (environmental, social and corporate governance) sector, according to Knight Frank’s The Wealth Report 2022. However, taxation is one of the disruptors facing the industry, it warns.

The report aims to provide an annual assessment of how wealth creation is shaping investment markets while highlighting the opportunities and risks.

The panellists at the presentation of the report on March 3 included Knight Frank’s head of private office Rory Penn, global head of research Liam Bailey, The Wealth Report editor and head of rural research Andrew Shirley, The Wealth Report deputy editor Flora Harley, head of commercial research William Matthews, head of international residential research Kate Everett-Allen, private office partner Sarah May-Brown and head of UK residential Tim Hyatt.

The average value of luxury residential property increased by 8.4% in 2021, says the report, the highest annual increase since the Prime International Residential Index (PIRI 100) was launched in 2008.

“Of the markets tracked, only seven saw prices decline in 2021. We dive into the numbers pointing to the outperformers (44% growth in Dubai), the most expensive (you need US$34 million to access the top of the Monaco market) and the most in demand (53 nationalities own property in Provence, Europe’s most diverse market),” it adds.

During the online presentation, Harley said, “The standout story really was the movement of wealth into the prime residential property markets. Our prime international residential index, which benchmarks 100 markets around the world, saw record performance with an 8.4% growth year on year on average. And that’s the highest on record that we’ve seen since 2008.”

Penn said, “We’ve seen a lot of reassessment of housing needs from a number of wealthy individuals, as they sort of are no longer tethered to the office; they can now potentially move further away. And that’s had a big impact on demand. The Americas was the top performing region. We saw, on average, markets there increase by nearly 13%.”

“London is seeing growth. The prime market is up by 2% to 3% [depending on where you are in the city]. It has been a slow market over the past few years. In the last year, we have seen positive growth that isn’t rapid. But there is certainly an increasing confidence in the market,” said Harley.

“We’ve also seen renewed interest in commercial sectors that have been hit hardest by the pandemic, be that offices, hotels and retail.”

Risks and disruptors

The report discusses the risks to wealth that have cropped up amid the pandemic. Bailey said, “You have to look at the wider picture. When you do, risks do start to emerge. Although wealth has increased vastly around the world during the pandemic, wealth inequality has also increased.”

According to the report, in its attitudes survey, Knight Frank asked ultra-high-net-worth individuals (UHNWIs) what they thought were the biggest threats to wealth accumulation. Taxation was highlighted as one of the threats.

May-Brown said, “Tax and regulation is one of the top threats identified. 

Governments have amassed huge deficits during the pandemic. That hole will have to be filled by something.”

The panellists covered the cooling measures and taxation in real estate. “We’re already seeing these, particularly in locations across Asia, but [they are still] aimed very much at the top of the marketplace. It is an opportunity to raise tax from wealthy purchasers, and having a side benefit of restraining growth in the marketplace,” said Penn.

Last year, tax was increased in countries like Singapore, said Harley. “We are going to see a push for greater transparency. In the EU, we have witnessed that in terms of residency and citizenship initiatives. We know that a number of policymakers are now looking closely and potentially at new ways to tap into taxing wealth to curb price inflation over the coming years.”

Inflation is another key factor. “We know we’re moving into a higher inflation environment, where rates are going to rise. And the question on every investor’s mind is how quick that process is,” said Penn.

Families are diversifying their portfolios from a wealth preservation perspective. “Because of the rise in inflation, we will certainly see families becoming more focused on income-generating assets,” he said.

“What we would say is that the right type of real estate can be a very effective inflation hedge. We would expect to see investors looking carefully at whether they can utilise real estate in their portfolios to mitigate some of these risks and [what] they perceive as ramifications of inflation. What that means for asset classes, I think that is going to be the big story of 2022,” said Penn.

Opportunities and outlook

In terms of the outlook for 2022, the report highlights the demand for ESG-compliant assets and the globalisation of real estate as an asset class over the longer term.

“The three letters that are increasingly dominating investment debates have gone mainstream. Some 80% of wealthy investors want more ESG-compliant assets, the main reason being to future-proof their portfolios. And why not, when we report a value premium of up to 18% for the ‘greenest’ offices? The biggest barrier for future investment is a ‘lack of opportunities’ — a clear call to action for developers,” it says.

“As we look to the year ahead, we think 2022 is going to be a record year for cross-border investment activity in real estate. For example, what we saw last year was record levels going into the port of Los Angeles, record shipping levels going through the Suez Canal, despite the fact that it was blocked for six days at the beginning of 2021. Globalisation is on the rise,” said Harley.

“We’re seeing tokenisation now coming into the real estate sphere. In recent weeks, there has been a large institutional investor potentially looking at actually tokenising real estate. So, we could see [this] opening up property investment to a much bigger audience.”

A huge amount of wealth is targeting property in the digital space, and much more is expected to be invested. Some 18% of UHNWIs have bought cryptocurrency or crypto tokens while 11% have purchased non-fungible tokens, she added.

For FY2022, the panellists foresee prices continuing to rise across most markets. “The housing boom that we’ve seen to date that will endure at the top of the rankings in our forecasts are Dubai, Miami and Zurich. We expect all three markets to see growth of around 10% to 12% in 2022, the extent to which the normal rules and laws around housing market economics have been totally upended,” said Harley.

“London (+7%) and Moscow (+7%) enter the top of our rankings table for the first time in several years while New York’s forecast of +5% will signal a marked turnaround following four years of negative annual price growth. Europe’s top cities may sit mid-table, but growth of 4% to 10% is buoyant by historical standards. Debt will remain cheap, with the European Central Bank likely to be among the last to tighten monetary policy,” says the report.

Asian cities are expected to trail slightly in 2022 but even here, prices will grow. “Key themes to watch: agents will complain about stock shortages, buyers will complain about rising taxes and cooling measures, and city markets will be back in demand — but look out for the fallout from China’s property slowdown,” it adds.

According to the report, a growing share of private capital is pouring into property. “While private investors increased their exposure to real estate investments by 52% in 2021, institutional investment volumes rose just 29%. Private capital now accounts for 35% of all investment transactions. With 23% of UHNWIs planning to invest in property this year, we tip offices to be the biggest target, with logistics piping residential to second place for the first time.”

The panellists highlighted other big opportunities for investors over the course of this year, namely to tap into economic growth. Shirley said, “This means investing in sectors that are growing some of the newer sectors [such as] life sciences, technology, LED, data centres and so on. But also in those sectors that are poised to benefit from a return to work offices, types of retail, leisure and hospitality.” 

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