As the numbers of Asia Pacific HNWIs look to overtake North America in the next few months, their investment in real estate has been among the main factors for the growth, says data expert, Capgemini
Rises in the value of real estate around the world has helped increase the wealth of High Net Worth Individuals (HNWIs) in Asia Pacific, according to a new report.
Asia Pacific’s HNWI population rose 17.3%, compared to 13.5% in the rest of the world, while wealth expanded 18.2%, compared to only 12.3% for the rest of the world, the 2014 Asia-Pacific Wealth Report states.
Rising real estate prices and investment was instrumental in the growing wealth, says the in-depth report by data provider, Capgemini.
And higher growth in Gross Domestic Product resulted in a new regional high of 4.3 million HNWIs with a record US$14.2trillion of assets, which means that Asia Pacific is set to overtake North America as the region with the highest HNWI population in the next two months and HNWI wealth by 2015.
An important factor in the rise of Asia Pacific wealth is increasing property values. “Asia Pacific leads HNWI expansion, helped by strong growth in both Japan and China. The region’s fast-paced economy, particularly within its more mature markets, helped push the rise in HNWI wealth, as did strong real estate prices,” says the report.
Growth in 2013 was mainly driven by mature markets, while emerging markets experienced a lower than usual increase.
Asia Pacific ultra-HNWIs have increased their ranks and their wealth more than all other HNWIs in the world over the past six years and, led by Australians, they invest in property more than any other asset.
“Real estate represented the largest investment allocation made by Asia Pacific (excluding Japan) HNWIs, reflecting increased optimism and greater risk appetite in the region. Improved investor sentiment was also likely behind a significant decrease in cash held by Japanese HNWIs.”
In contrast to HNWIs in the rest of the world, those in Asia Pacific (excl. Japan) invested more in real estate than in equities. Real estate accounted for 23%, around 4% higher than the 19.5% invested by HNWIs in the rest of the world.
“While a continued optimistic outlook on the health of the regional and global economics may explain their higher allocation into real estate vis-à-vis the rest of world, cultural preferences may have also played a role, as Asians tend to be attracted to physical assets, such as properties, (especially when land is scarce or inflation is high) over those that are less tangible, such as stocks and bonds.”
At 33.1%, the allocation by Australian HNWIs to real estate was the highest in the world, although it dropped from 40.6% a year ago.
“Record-low interest rates in the country could be sowing fear of a property bubble, explaining the drop. Correspondingly, high allocations to real estate resulted in lower allocations to other asset classes for Australian HNWIs, compared to HNWIs elsewhere.”
In China, investment allocations remained virtually the same from 2013 to 2014. Compared to HNWIs in India, those in China had higher allocations to equities (22.7%vs. 18.0% in India) and less to real estate (20.2% vs.26.2% in India). On the other hand, India stood out for its third- highest allocation to fixed income globally at 21.5%, possibly a result of higher interest rates in the country that drove allocations away from cash.
Allocations to foreign exchange were notably higher among Asia Pacific (excl. Japan) HNWIs, reaching 19.1%, compared to 14.5% in the rest of the world.
Japan led the way at 33.6% of its total allocation to alternative investments (12.4%). With HNWIs in Asia Pacific often being business owners, who have business interests spread across the region and globally in some instances, the region’s HNWIs may be more comfortable with using multiple currencies for their wealth.
The measure of personal ability to generate wealth reflects HNWI attitudes toward the health of the economy, their own business prospects, and other important wealth-creating vehicles, including real estate, says the report.
“Only along this measure did Asia Pacific (excl.Japan) confidence levels decline (by 2.4 percentage points). Yet at 88.1%, HNWIs still had higher confidence in generating future wealth compared to the rest of the world.”
China (93.2%) and Indonesia (93.1%) ranked first and second globally in terms of their level of confidence in generating wealth.
By market, the largest decrease in confidence related to generating wealth came from Singapore, where an 8.4% —perhaps a reflection of a drop in real estate prices, exacerbated by persistent inflation—led to confidence levels of 76.6%, below the rest of the world average of 81.1%.
Other markets to experience a loss of confidence in generating wealth were India (-5.2%), Australia (-3.6%), and China (-2%). Confidence increased in Hong Kong (3.4%) and Japan (2.4%).
Property prices rose across most of Asia Pacific as the region continued to benefit from stable, relatively lower interest rates as well as positive sentiment surrounding the gradual recovery of the global economy.
Real estate prices in the key markets of Taiwan and China witnessed a strong increase. Prices accelerated the most in Taiwan (14.5%), causing the government to make amendments to its House Tax Act, increasing taxes on unoccupied residential houses and narrowing the gap between property prices and incomes. In China, they rose 10.1%. Australia also posted solid real estate performance, with prices rising by 6.5%, while Japanese real estate increased 3.9%.
Among markets benefitting from an inflow of real estate investment from mainland China were Hong Kong, Singapore, and Australia.
The higher levels of trust and confidence Asia-Pacific (excl. Japan) HNWIs had in the wealth management industry may have played a role in their greater focus on wealth growth (40.7%) over preservation (31.1%). In contrast, HNWIs in the rest of the world were more focused on preservation (31.7%) vs. growth (27.7%).
The focus on wealth growth over preservation differed across markets. At 48.4%, China had the highest focus on growth globally, followed by Indonesia (third highest at 44.1%) and Singapore (39.3%). India was an exception to the focus on growth, with 40.0% of HNWIs expressing higher focus on wealth preservation, ranking second globally after France. At 34.0%, HNWIs in Malaysia also indicated a greater focus on preservation over growth.
Asia-Pacific (excl. Japan) HNWIs were more aggressive in increasing their investments outside their home markets than HNWIs in the rest of the world. Allocations to international markets in 2014 stood high at 43.4% for Asia Pacific (excl. Japan) HNWIs, compared to 35.2% for those in the rest of the world. Europe attracts the largest share of wealth from Asia Pacific (excl. Japan) HNWIs at 15%, followed closely by North America at 14.2%.
HNWIs in some Asia-Pacific markets allocated more to international investments than others. Those in India, China, Hong Kong, Malaysia, and Singapore had more than 40% of their assets invested outside their home markets, while those in Australia and Indonesia limited their international allocation to 30.4% and 34.7%, respectively.
Across Asia-Pacific, HNWIs who invested the most in North America were from China, allocating 18% of their financial assets to this region, while those who had the highest allocation to Europe were from China and Hong Kong, investing 16.2% of their financial assets in this region. The highest allocations to the Middle East and Africa came from India, at 19.4%, while Singapore allocated the most to Latin America, at 7%.