February 12, 2019

The very wealthy always invest in property and land

Have you heard of a family office before? A family office is an organisation dedicated to managing the financial and personal affairs of a wealthy family. On the financial side, they protect that wealth through the careful management of the family’s assets, trusts, and other investments (source: Forbes).

For a family office, return of wealth is the key primary consideration. Once this has been achieved, their target is to to diversify the range of the family’s investments with a view to producing 6-15%-range returns over the whole portfolio. (Source: Wilson, R. (2014). Single Family Office: Creating, Operating & Managing Investments of a Single Family Office).

Each family office is unique, driven by different financial goals and run under different operating practices and principles. One of the primary ways they protect a family’s wealth is through diversification, but what’s that.

In this article, financial journalist Clare Tweed looks at where the wealthy, and their advisors, invest money and why property and land are in such demand.

What do the world’s wealthiest invest in?

According to CFO,

The average family office investment portfolio consists of:
• 37% in equities (stocks and shares) and bonds
• 29% indirect investments (“private equity, venture capital, and real estate”)
• 8% held in cash
• 8% in hedge funds
• 7% in private equity funds
• 4% in agriculture and commodities
• 4% in exchange-traded funds, real estate investment trusts, and so on.

The reason behind the wealthiest on the planet having such a wide range of investments is that it protects that wealth through diversification. Not all markets follow each other so the rationale behind this strategy is that losses in some markets may be offset partly or fully in others.

Property plays a big part in any family office portfolio. According to Anna Sulkin at WealthManagement.com, “56.6 percent of investments were directed towards commercial properties, with 43.4 percent allocated to residential properties. The home bias (investing locally) continued to hold this year on both the commercial and residential sides.” Evan Tarver at Investopedia believes that “ownership in illiquid assets, especially ones that are uncorrelated with the market, is beneficial to any investment portfolio. These assets aren’t as susceptible to market swings, and they pay off over the long term.”

What are the key fundamental reasons for investing in property and land?

There are a number of reasons behind the popularity of property and land as an investment for the ultrawealthy, other than diversification and the anticipated rise in value over time.

Government encouragement

Many countries from Monaco to the UK to the US actively encourage offshore investment into their property market. According to Maury Golbert, chair of the Real Estate Group and Executive Committee at Berdon LLP comments, “when a HNW individual is from a volatile area or is investing in the context of an unstable world then the safe haven aspect of…real estate holds particular appeal.” Governments gain by attracting as much inward investment as possible into their countries.

Government behaviour

In developing countries where the legal framework of ownership is not as well established as, for example, the UK, owning property abroad offers HNWIs an escape route in case of an economic downturn or political turmoil in their home countries or on investments they’ve made in riskier jurisdictions (source: PR Invest).

One recent example of this was the imposition of capital controls on out-of-country investments in China (source: Bloomberg). Business hates uncertainty and businesspeople and their families hate disruption. It’s difficult to plan for something that you don’t know is going to happen.

While wealthy families will keep much of their wealth often in their home countries, the purchase of a property in more stable nations will provide them with a bolthole to retreat to if the domestic situation gets really bad and, in many cases, having a property and other sources of wealth in these countries will make applying for residency or citizenship easier.

Currency moves

Following the referendum in the UK in 2016, the pound dropped sharply against the US Dollar and the Euro (source: FullFact).

As reports Chris Harvey, the head of UK real estate at Mayer Brown, “we noticed a marked increase in investment from buyers based in Hong Kong, which isn’t caught by the capital controls.

“These range from high net worth individuals, to family businesses and listed companies controlled by wealthy families and their private money.

“They sought to take advantage of the weak pound and comparatively attractive yields, though maintained confidence in the long-term health of the UK economy.” (Source: South China Morning Post)

Desire for a different life for themselves and their family

A recent survey carried out by Global House Buyer and the Hurun Research Institute called “Overseas Property Needs of Chinese HNWIs 2017” found that just over half of Chinese HNWIs bought foreign property close to respectable educational institutions to which they intend to send their children in the future.

Parents are keen to visit their children studying overseas and, if they have retired by this point, investors belief that exposure to the culture, lifestyle, and food of the country in which they had their apartment “would inject variety into their twilight years.” (Source: China Daily)

Exposure to a range of markets

According to Savills World Research, land for development is the most popular investment among HNWIs closely followed by agricultural land. Did you know that “UK farmland has enjoyed spectacular capital value growth over the last five years”?

Nearly half of all HNWI buyers and their advisors intend to invest in residential property, according to the survey.

“Residential property remains a status symbol for many, accumulating business bases and leisure property, as well as investment portfolios for income return. Private wealth has a greater propensity to invest in residential than their institutional counterparts”. HNWIs want to be involved in markets with room for capital growth and significant annual yields when their property is rented out to others.

Paul Tostevin, associate director at Savil’s head office in London, believes that the outlook is good for land and residential property over the next five years.

Some invest in luxury homes for investment and enjoyment

“As markets waiver, the rich park money in luxury homes”, according to a New York Times leader from 2016.

Inc.com agrees stating that “as long as it maintains its value, wealthy investors are happy. When (exclusive real estate) does hit the market, there’s a lot of interest.”

The Azurite Property bond

Monaco, the principality based in the South of France, is an ideal example of the strong desire for the world’s wealthiest people to invest in property for capital accumulation, lifestyle enhancement, and, where applicable, rental income.

The Monaco government greenlighted a land reclamation program expected for completion in 2022. The aim is to create more residential units for both the native population and overseas residents.

The Azurite Property Bond, allows investors the opportunity to provide funding for development on new residential property and the refurbishment of existing property inside the principality of Monaco.

The Azurite Property Bond

The Azurite Bond is a property bond offering for sophisticated investors and high-net-worth individuals, providing the opportunity to invest in the residential infrastructure of Monaco.

To learn more about the Azurite investment, please download our brochure here.

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