Knight Frank’s Liam Bailey: Real estate remains the preferred asset class for ultra-wealthy individuals

March 7, 2024

The persistent high interest rates and continuing geopolitical tensions have led to a closer affinity between private capital and real estate, and more ultra-high net-worth individuals (UHNWI) prefer to invest in real estate.

In 2022, the global interest rate shock wiped out about $10 trillion off the portfolio . But in 2023, wealth creation returned, primarily due to a recovery in asset prices, Knight Frank’s Global Head of Research Liam Bailey told businessline.

Recovery in financial assets pushed up the portfolios of wealthy individuals by about 25 per cent while other asset classes, such as Bitcoin, also revived significantly, he said.

Bailey is also the editor of the Knight Frank annual Wealth Report, which this year said around a third of ultra-rich Indians had investments in the residential real estate sector, and 12 per cent of the wealthy are planning to buy a new house this year. Around 22 per cent of global UHNWIs are planning to invest in residential and 19 per cent in commercial.

Excerpts from the interview.

In the Wealth Report, you discussed a strong affinity between private capital and real estate. Could you elaborate on that?

Over time, we have tracked the propensity of wealthy individuals to purchase property. For example, this year’s survey results show that 19 per cent of ultra-net-worth individuals are interested in investing in commercial real estate. The interesting piece, I suppose, is where that money is likely to go in terms of different segments. People often talk about an appetite for things such as the life sciences sector or data centres. Those sorts of things are very much ‘of the moment’ because there isn’t much liquidity in those markets. You end up with most investors focusing on the office market because there’s just a deeper pool of assets to invest in. We’ve worked with a number of very wealthy individuals in the London market from around the world, and they see an opportunity to buy secondary buildings in good locations and spend money to refurbish, improve, and enhance those assets.

There is a shortage of best-in-class stock in most markets. There has been a shift in people’s behaviours around working from home, but corporates are very interested in occupying the best positions they can.

Are the UHNWIs investing in real estate in their home countries or different countries?

I would say that most activity takes place domestically, but the overseas market does grow year on year. And certainly, in markets like London and New York, we observe quite high penetration of cross-border funds into those markets. Some of the European markets are bolstered by the fact that you’ve got high cross-border activity within the European Union, for example. But yes, I mean markets have become much more international at the time. Markets have become more cross-border.

In India, many people are investing in overseas properties, especially in the UAE. As a result of this increased activity, how do you see the trend in property prices?

Well, I think there’s quite a difference at the moment between commercial and residential property. Commercial property values are set in the investment market, whereas residential prices are often or generally set in the unoccupied market, so there is a difference in behaviours.

Commercial property has obviously been hit by increased interest rates, and there has been a correction, depending on where you are now, 10 per cent plus in terms of values. There is likely to be a continuation of that over the course of certainly the first half of this year, as rates begin to come down globally and the pressures on pricing should begin to ease.

Residential markets are a bit different. It fell globally initially, at the end of 2022 and the beginning of 2023, and then prices began to bounce back over the past three or four months in most markets. And I think one of the drivers in residential markets was the fact that you had a lack of stock in the market because a lot of people on fixed- rate mortgages didn’t want to lose those fixed-rate deals they were on. The biggest impact of higher rates has not been on prices in the residential market buton transaction volumes. For example, in the London market in the past 12 months, transactions have been down about 10 per cent in central London, and in the UK as a whole, transactions have been down 27 per cent year on year. But I think as rates come down in the second half of this year, hopefully, you’ll see more confidence from owners to bring properties back to the market, and you should see an increase in liquidity. We are expecting to see sales volumes begin to grow by the second half of the year.

Apart from property, are wealthy individuals investing in other areas such as like art and collectibles? Have you seen an increase in that?

We note in the report that there was a difference in the collectible sector. There were some very high-profile record-breaking sales that took place, and we saw a record-breaking price for a Ferrari auction. We hit some record levels at an auction for particular diamonds. There were also records for paintings, but overall average collectible prices were down by 1 per cent. I think actually quite a bit of money that would have gone into collectibles actually went into equities. The key takeaway is that prices overall are slightly down, but actually record prices were set for particular assets. And it just shows that there is a kind of difference between best in class and the wider marketplace.

Everyone is waiting for the US Fed to start the ball rolling in cutting interest rates. If it delays the whole process of interest rate cuts, or the quantum of cuts is not as high as expected, what would the effect be on the property market and other sectors?

It will be negative. There is a much more positive view on the real estate market outlook this year versus last year, and rate cuts are almost assumed by the market. They’ve been pushed out a bit, and there’s a recognition that there may be fewer cuts than were expected three months ago, and they may take place later than they were initially expected. But I think if they are delayed, if they don’t happen this year or if they are pushed into 2025, that will prove to be negative for all the markets.

A lot of the current uptick in sentiment is based on the assumption that these cuts are coming by late spring in the US and then summer for the UK and other markets.

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