In the search for yield, the world’s ultra-wealthy are moving into commercial real estate, having previously held limited scale residential for personal use.
Many are seeking investment opportunities in commercial real estate with Asia’s rich, particularly those from China, now competing with institutional investors for large prime assets.
There is good reason for this: the major global real estate markets are in better shape than at any time since the global financial crisis as the yield gap between property and long-term bond yields has widened to near record levels.
In 2014, the aggregate wealth of world’s ultra-high-net-worth (UHNW) individuals increased 7 percent to nearly $30 trillion, according to Wealth-X data. On average, UHNW investors own 2.7 residential properties each, and real estate assets account for over 8 percent of their net worth.
UHNW individuals usually invest for the benefit of future generations of their families and hence have a longer-term investment horizon than institutional investors, who have defined fund lives and annual performance metrics to satisfy. As such, UHNW investors seek strategies for capital protection, with less short-term capital appreciation and greater emphasis on steady long-term income streams with inherent inflation protection. Newly created Asian UHNW are finding that real estate offers their portfolios the characteristics to manage their investment objectives, in much the same way that European and US UHNW have found in previous decades. Having made money in trade, mining and manufacturing, they want to convert that wealth into real estate for future generations.
The US and Europe are home to the majority of wealthy individuals and Asia ranks third in terms of UHNW population. However, Asian economies are among the fastest growing. According to The International Monetary Fund (IMF) World Economic Outlook, Asian economies will lead global growth in 2015, with average expansion of 5.6 per cent across the region. At the current cycle of wealth creation and economic growth, the region is expected to overtake Europe within the next ten years in terms of the amount of wealth held by UHNW investors.
Forbes 2015 billionaires’ list shows Asia-Pacific leads the world in terms of real estate wealth, with 96 of the 157 global real estate billionaires. By country, the US has the highest number of real estate billionaires, with 33. China ranks second at 30, followed by Hong Kong, with 24 real estate billionaires. Among the wealthy, those in Asia and Europe tend to hold a higher proportion of their wealth in real estate assets compared with rich individuals in the US. Those who made their money in real estate are more likely to keep their money in real estate.
According to our data (see chart), which analyses a basket of our Jones Lang LaSalle office global yields against IMF data on global real interest rates and the real return of equity, the spread between commercial property yields and real bond rates is high by historic standards and remain significantly wider than their recent low preceding the global financial crisis. That is despite the fact that yields have tightened in recent months. Even with higher real bond yields, commercial real estate will still provide the long-term income stream characteristics that UHNW value.
While wealthy Asians have been interested in valuable prime office space, hotels and retail properties, there is also a notable increase in interest for higher-yielding assets in smaller and second-tier locations, particularly in the US and Europe – in part due to intense competition and yield compression in prime markets. With the broadening and strengthening of property market fundamentals, investors are becoming more flexible and, in Asia, new players are moving into markets like the Philippines, South Korea, India and Thailand.
The real estate market in the first quarter of 2015 saw continued strong demand for direct real estate. Although the US has pulled back its quantitative easing program, the Eurozone and Japan are taking up the baton of providing ample liquidity to global markets. Interest rates in the US may move higher later in 2015, which would gain the attention of real estate investors in the world’s most liquid market. JLL estimates that the rate of growth in global investment transactions will moderate to between 5 percent and 10 percent in 2015. However, this will still result in volumes of $740 to $760 billion, matching the record levels of 2007.
Last year, Asian high net worth capital is estimated to account for a third of all outbound capital into direct real estate. These investments by the region’s wealthy individuals, as well as Asian sovereign wealth and pension funds, have been formidable contenders for prime real estate in investment grade and safe haven countries such as the US and western Europe.
Based on JLL statistics on investment grade commercial properties, Chinese investors purchased a record $16.5 billion in real estate assets in overseas markets, a 46 percent increase over 2013. According to our latest figures, commercial real estate led the growth with investments increasing by almost 50 percent to over $11.2 billion during the year. This is the first time in history that Chinese buyers have spent more on commercial real estate outside of China than domestically. The surge in outbound investment lifts China into the top five major cross-border capital sources worldwide.
One example of this is a family office managing the assets of a wealthy Chinese family, purchased close to $2 billion worth of commercial real estate between December 2012 and May 2015. The family office acquired two office assets in Australia as well as the Hilton Hotel in Sydney for A$442 million ($353 million), the Marriott Hotel in Paris for €350 million and the Grand Park Orchard in Singapore.
Asian HNW are increasing in number and are proving to be a force within international real estate markets, and we see no sign of this abating.