World's wealthy create

safe haven property

markets most notably

in London and Miami

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Wealthy people are shunning emerging property markets as they value security, good education for their children over volatility, political insecurity and risk, new research shows.



The most important buyers are from China, Russia, the Middle East and Latin America but they are not buying property in their own countries but in well established markets, according to The Wealth Report 2012 from property consultants Knight Frank.

They are buying for lifestyle reasons and look to well established markets such as London, New York and Miami and created the concept of the safe haven property market.

‘The problem in so many emerging world countries is governance. The newly enriched become aware of the potential impacts of corruption and arbitrary rule changes on their ability to plan for inter generational wealth transfers. In extreme cases, as wealth steadily increases, so too do the perceived risks from falling out of political favour,’ the report says.



It points out that Miami saw double digit growth of 19% last year and is now viewed as one of the world’s most important cities by wealthy buyers from Latin America.

New York has experienced a similar process to that seen in Miami, with an influx of overseas money pushing prices ever higher. ‘The Chinese market opened up rapidly in 2011 with buyers from there joining other wealthy investors in targeting the $1 million to $3 million Manhattan market,’ said Jonathan Miller, head of New York property analyst Miller Samuel. Up to a third of Manhattan’s prime market sales are now going to foreign buyers.



Charles Douglas, a London based property lawyer specialising in transactions for High Net Worth Individuals, says issues like the Arab Spring and this year’s Russian elections are classic examples, with popular uprisings on the one hand and overweening government power on the other.

‘The wealthy are considering their options, and these include where they buy property and invest their wealth. Look at London; the angst in the wealth and property industry over higher tax rates and new levies on property has been almost entirely misplaced. The reality is that tax is only part of the picture for the super rich. What they really value is the lifestyle that comes with an open, cosmopolitan environment, excellent education for their children and both personal and property security,’ he explained.



While wealth creation is booming in the emerging world and the developed world is mired in debt and austerity, the markets that have benefited from the emerging world’s largesse have largely been those in Europe and North America, the report points out. ‘The fact that so many top end properties from Monaco to Miami are being bought with wealth from the BRIC countries of Brazil, Russia, India and China, and beyond confirms the simple transfer of economic power that increases every year,’ it says.

The report reveals that many of Europe’s most established prime locations are already feeling the pinch. Monaco can still comfortably claim the most expensive real estate in the world, but prices there, along with the French Riviera, fell in 2011, in part confirming the impact of the eurozone crisis on market performance. ‘It is no coincidence that the only two European cities in our Prime International Residential Index  that recorded price increases last year were London and Zurich, both outside the eurozone,’ explained Liam Bailey, head of residential research at Knight Frank.



London’s prime housing market is seemingly powered by buyers from across the globe. The city, which once again topped The Wealth Report’s annual ranking of the urban centres considered to be the most important by hnwis.

But not all safe haven locations are in the Western world. The startling performance at the top end of Kenya’s housing market is a particularly interesting example of this, says the report. Price growth in both the Kenyan capital Nairobi and the country’s Indian Ocean coastal hotspots outstripped all other PIRI locations, with Nairobi property chalking up a 25% increase last year.



‘Safe haven isn’t necessarily a phrase many people would use to describe the country in a global context, but compared with many of its neighbours it is just that,’ said Ben Woodhams, managing director of Knight Frank Kenya. He says that Kenya’s rapid economic development is attracting domestic and international private equity, with particular growth in remittances flowing from Kenya’s increasingly affluent diaspora.



However, recent events such as the kidnapping of tourists staying on the north coast and a sharp rise in interest rates to almost 25% also highlight the potential vulnerability of some emerging prime markets.

New Zealand’s isolation from the world’s conflict zones makes it possibly the ultimate safe haven destination, and this has been reflected in property prices. Layne Harwood, managing director of Knight Frank New Zealand, says last year’s 5% rise in prime Auckland prices was due to an increase in Asian buyers, particularly from China and Singapore, looking for security and stability.

While capital flight from emerging economies to safe havens has been integral to the performance of the world’s luxury housing markets, the story that grabbed the media’s attention in 2011 was the potential for a Chinese property crash. Price falls in Singapore, Sydney and Shanghai, who were among the fastest growers in last year’s PIRI survey, confirm the unravelling of speculative price booms in Asia Pacific.



‘This concern is hardly surprising. China’s housing market arguably forms the single most important sector in the entire global economy. In 2011, China's construction sector accounted for 13% of its GDP, 20% of global steel production, and was the dominant consumer of the world’s iron, copper and cement. The performance of China’s housing market matters,’ says the report.

While mainstream prices have been falling across the tier one Chinese cities, the prime markets have fared slightly better, although growth is slowing. Prices in Beijing’s luxury sector, for example, rose by a healthy 8% in 2011, but this was largely due to a strong performance in the first half of the year.

But the report says we shouldn’t be overly surprised that prices are falling in some of Asia’s prime markets as the falls follow huge booms over the past two years. ‘Shanghai prime prices might have fallen 3.4% in 2011, but they are still 37.5% higher than they were in early 2009,’ said Thomas Lam Ho Man, Knight Frank’s head of research for Greater China. In addition, the Chinese government has made a concerted effort to halt runaway price growth. This objective confirms two key issues that will become more and more important for future performance in the prime residential market.



The first is the political reaction to a widening imbalance in the distribution of wealth in China. As well as the potentially destabilising economic effects of rapid price growth, the Chinese government has become increasingly worried about rising popular discontent as housing affordability becomes an issue even for the country’s middle classes.

The attempt to control prices in China has seen investors switch their focus to commercial property markets and also to the prime residential market in Hong Kong. Mainland Chinese buyers now make up 25% of prime market purchases in Hong Kong, where prime apartment prices rose by a further 4.6% in 2011, compounding the 60% growth seen since the beginning of 2009.

In India, meanwhile, the government has not had to resort to specific cooling measures to check the growth of the country’s burgeoning prime residential markets; weaker economic conditions and high inflation, with a concomitant decision by the Bank of India to raise interest rates 13 separate times in 2011, contributed to prices in Mumbai falling by more than 18% last year.



India’s prime market is unusually vulnerable to internal economic events because the country’s strict limits on foreign buyers removes the potential safety net provided by inward capital flows from overseas buyers. Elsewhere in the Asia Pacific region, prime Australian prices have also slipped as affordability becomes an increasing constraint.

But weaker price performance is not the whole story of Asia's prime residential market. Knight Frank Indonesia’s Fakky Hidayat points out that Jakarta’s strong performance in 2011, up by over 14%, resulted from the steady growth of Indonesia’s domestic economy. However, a lack of clarity over new anti money laundering regulations being introduced in March this year could cause uncertainty in 2012, he adds.

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Around the world, tight supply has been a factor in several markets, helping to limit price falls. For example, in Barbados and the British Virgin Islands, which saw -5% and 0% price changes respectively, geographical constraints and development policies have restricted development. Similarly in Moscow, a series of new planning restrictions in the city’s central zone helped to push prices higher in 2011 by nearly 10%.



This imbalance between demand and supply has acted to limit price falls and has even supported growth among the world’s luxury ski resorts. Though strict growth controls apply in Aspen, Colorado, Brian Hazen of local real estate agent Mason Morse reports that the number of sales rose 15% in 2011. The deals included 13 properties worth $10 million, up from eight in 2010.









source

propertywire