A Small(er) World After All?
For today’s affluent, the world of luxury real estate is more accessible than ever.
By Camilla McLaughlin
Maybe it all began with the Jetsetters, an urbane group “Vogue” later dubbed “the beautiful people,” who supposedly flitted (by jet) from St Moritz to the Bahamas to Cannes in pursuit of events and holidays. Today, that jetsetter is likely to be a global citizen, who rather than haunting resorts, is apt to own homes in multiple countries and view international real estate as much as an investment as a lifestyle. And instead of hailing from the U.S. or Europe, they might also be from China, Russia, India, Mexico, South America or Africa. As dissimilar as this group might seem, they actually are more alike than different.
“I think the affluent of the world are becoming more aligned,” says Paul Boomsma, CEO of Luxury Portfolio. “If you are in an affluent circle, it doesn’t matter where you are in the world; you have commonality.”
“High-net-worth individuals frequently have the need to be in multiple places for extended periods of time throughout the year. Business, access to education, family, and even citizenship — these are all factors driving the wealthy to purchase multiple homes in multiple locations around the world. To some, there is no primary residence anymore,” observes Meghan Barry, president of Who’s Who in Luxury Real Estate and LuxuryRealEstate.com.
Globally, “real estate is starting to process more similarly than differently,” says Stephanie Anton, Luxury Portfolio’s executive vice president. “No matter a person’s origin, the affluent consumer today cares about very similar things. Whether it’s their overarching concerns for their family and business to the way they see and invest in the world. They travel to the same places, invest in similar opportunities/markets, et cetera. And they’re spending their money similarly as well.”
“The world is becoming much more of a global real estate marketplace,” says Philip White, president and CEO, Sotheby’s International Realty Affiliates. “Money can cross over borders easier than it used to. Travel to foreign locations is easier than it has been, so people can own in different locations more easily than in the past.” Add to that a 24/7 global news cycle and instantaneous communications with a virtual presence and the world suddenly seems much smaller than it did even five years ago.
Today, depending on their level of wealth, the ultra-high-net-worth individual likely owns three to five homes in various countries. Travel and communications might be facilitators but the biggest catalyst has been the explosion of wealth at the highest levels, coupled with a renewed interest in hard assets as a portfolio play and in lifestyle objectives, including education for children.
Speaking of the wealthy today, Royce Pinkwater, founder of Pinkwater Select, a luxury real estate brokerage and publisher of The Pinkwater Report says, “They want to be able to invest in something that is there and is going to be there tomorrow. Real estate, in addition to art, is the most desired hard asset there is.”
More Wealthy Worldwide
In the last decade, the ranks of the ultra-wealthy have risen 61 percent, according to Knight Frank’s 2015 edition of The Wealth Report, and this explosion of wealth is creating growing demand for luxury properties worldwide. Last year, the number of ultra-high-net-worth individuals (UHNWI) grew by 5,200 individuals; 1,180 individuals became centa-millionaires. The billionaire club increased by 53, bringing the number worldwide to 1,844, an 82 percent increase compared to 2004. Among the wealth advisors surveyed by Knight Frank, expectations are the U.S. will continue to be a dominant force in terms of the ultra-wealthy through the next decade, but Asia overtook North America in 2014 as the region with the second largest UHNWI growth. Europe continued to be the region creating the most ultra-wealth.
“I think as their wealth has increased, they’re able to allocate more of it to luxury real estate and having multiple residences,” says White.
“We are finding that in addition to the vastly increased wealth in the world, the instability in the world, both politically and financially is another reason why people are investing in property in many different markets,” observes Pinkwater. “The United States is considered to be the most stable market in which to invest.”
For international buyers, the U.S. offers political stability, a range of attractive markets that offer excellent transportation, amenities that appeal to the affluent and excellent universities and secondary schools. As prices in New York and London continue to escalate, buyers also look to other U.S. cities for buying opportunities. “You know you will retain your value and chances are, based upon the track record of the last several years, your value will increase,” observes Pinkwater.
This is especially true in emerging market nations where “recent fluctuations are leading a new generation of UHNW investors to consider investing in luxury residential real estate in Western markets,” observed Wealth X in the recent “Homes as Opportunity Gateways” luxury real estate report prepared in conjunction with Sotheby’s International Realty. The report also cited citizenship or residency status becoming another incentive to purchase outside of one’s home country, noting, “For many, the passport is becoming as important as the neighborhood.” Approximately 20 nations in Europe and the Americas now offer citizenship or residency programs to individuals willing to invest in domestic residential real estate. The real estate investment minimum for many of these programs is US$250,000.
Recent measures in some countries to limit price appreciation or tax the wealthy are adding to the search for safe havens by nationals from a range of countries. Knight Frank found that a potential increase in wealth taxes and increased government scrutiny were concerns for more than three quarters of those responding.
Even though it’s not unusual for wealthy owners to spend less than a week a year in one of their properties, most hang on to them.
“They’re obviously holding them for investment purposes. Maybe to hold it to give to a child or something, but they’re allocating it to hedge something and they get some enjoyment along the way. But they’re all business people, and I think they look at if the assets are appreciating and they’re not using it and they can sell it effectively then they look at doing that,” observes White.
The Wealth Report 2015 also weighs in on the value of real property, which is “increasingly seen as a mainstream investment class, accounting on average for 32 percent of an ultra-high-net-worth individual’s investment portfolio.” Among the wealth advisors polled, 81 percent said their clients were becoming more interested in real estate. Just over a quarter of the UHNWI are considering purchasing another house in 2015 in addition to the three they already own.
For Europeans and Asians looking to invest in real estate, London has typically been their first stop, although New York today is generating almost as much interest. Monaco, which is both a place for business and vacation, continues to be one of the most expensive housing markets in the world, favored by wealthy buyers from Italy, Eastern Europe, Britain, South Africa, Australia, Scandinavia, Switzerland, the Middle East and Asia, according to Coldwell Banker Previews International. The average property now costs 21 percent more than before the recession, and the city still boasts some of the most expensive properties in the world, including a nearly $400 million penthouse under construction in the new Tour Odeon building. Overall, prices are nearly twice as expensive as London and three times more expensive than Paris.
Paris is gaining attention right now because prices are at a low as a result of wealth taxes. Wealthy Parisians may have left, but Pinkwater says others see an opportunity. “Other people in the world have decided they love Paris, no matter what. They have the money to do it and they’re investing because they believe they will be able to buy a property at a price” they won’t be able to touch 10 years from now. Other cities garnering new interest include Berlin and Malta. Foreign investors in Malta receive all the benefits attached to being a citizen and they also take advantage of the country’s flat tax rate.
Ibiza, which was hard hit during the recession, is now “the hottest European resort today, and that has only been true for two years,” shares Pinkwater.
Geography still plays a role where the wealthy buy. Sydney, which has great appeal in Asia and the Middle East, is considered by many to be a less expensive alternative to New York or London. Also, a number of multi-national corporations have a regional headquarters here. “Sydney is a very vibrant market; there is a lot of investing going on there and they’re getting record prices,” Pinkwater adds.
Frank Gehry and Richard Rogers have their imprint on the Sydney skyline. Sydney also has Point Piper, which is often considered one of the toniest suburbs in the world. The average sales time for luxury properties is 93 days compared to New York’s 87 days and San Francisco’s 71.
A growing number of starchitects are remaking skylines, and these signature properties — whether they are in Manhattan or Miami — attract global UHNWI. Dubai continues to garner international interest. During a recent visit, Joyce Rey, executive director of Coldwell Banker Previews International, met with agents from all four Coldwell Banker offices in the cities. “Seventy five percent of their market come from outside of Dubai itself, which is amazing.”
More than a location between the Rockies and the Pacific makes Vancouver an up-and-coming market, according to Wealth X, yet most observers would say it is already a well-established global city. Although the city’s ethnic make-up and tech-centered economy make it a natural for Asian investors, the U.S. ranks as the top country of origin for foreign owners.
Historically, locations in North America have represented the majority of U.S. consumer investment in properties outside of the U.S., with Canada accounting for about 72 percent. After a sharp drop off during the recession, interest in overseas properties from U.S. nationals has rebounded by at least 30 percent per year, beginning in 2013, according to data from Luxury Portfolio International.
The Bahamas’ international pedigree goes back to the days of the Jetsetters, and it continues to be a global hot spot for buying and investing. One draw, according to George Damianos, president of Damianos Sotheby’s International Realty, is the lack of income, capital gains, or inheritance taxes, and non-Bahamian investors who purchase residences valued in excess of US$500,000 may apply for a permanent residency certificate. The region is the second most popular spot to buy outside the country for U.S. nationals, although the U.K is the top country for foreign owners in the Bahamas.
Beginning in 2008, says Anton, U.S. interest in the region began to diversify to the Cayman Islands, Saint Maarten, Virgin Islands and then Belize and the Turks and Caicos. St. Barts is hugely popular with Europeans and other islands are now attracting interest from the Middle East. Recent changes in air routes have made travel here even more convenient for South Americans.
Rey expects private islands to be one of the most sought-after commodities in the future, underscoring how privacy has become a top concern for the wealthy. In fact, privacy, and also concerns about the growing power of the Internet both in terms of cyber-crime and the ability to invade privacy and damage reputations, led 76 percent of respondents in Knight Frank’s research to highlight it as a concern.
Vietnam, the Ivory Coast, Kazakhstan and Indonesia are set to see the largest increase in the ultra-high-net-worth populations over the next 10 years. Indonesia is expected to see a 132-percent growth in the number of ultra-wealthy people by 2024. Nigeria comes close with a forecast of 90 percent growth. In the future, the MINT (Mexico, Indonesia, Nigeria and Turkey) countries are expected to match and exceed the BRICS (Brazil, Russia, India, China and South Africa) in the pace of growth of the wealthy in their countries, according to Knight Frank.
Looking at the pace of technological change and rapidly evolving economies, one has to wonder what’s ahead. Already a number of companies are working to reinvent the Concorde with the next-generation of supersonic transport. The question is: how much smaller will the world seem five years from now?