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Wealthy Individuals’ Real Estate Allocation Unchanged at 15%

Wealthy Individuals’ Real Estate Allocation Unchanged at 15%

High net worth individuals usually run to safe assets like real estate in times of global market distress, but not this time.

Ultra-rich investors typically reduce equity allocation and opt for safer asset classes like real estate during crises, but the Covid-19 pandemic was an exception, according to the World Wealth Report 2021.

The report, which tracked asset allocation and investment behaviour of high-net-worth individuals (HNWI), showed that wealthy individuals had tended “to preserve” rather than grow their wealth during times of market volatility. While they typically allocated more of their wealth to safer assets like real estate, during the pandemic, they invested in equities, which carry more risks.

“From 1998 to 2002, real estate and investments other than stocks, bonds, and cash rose in popularity. In 2002, real estate made up a more substantial slice of the HNWI portfolio pie at 15% versus 10% for alternative investments,” the report read.

Higher allocation to equities

For this year, real estate allocation remained steady at 15% of HNWI’s total wealth, unchanged from their portfolio allocation level in 2020 and slightly down from 2019. Notably, wealthy individuals dedicated more of their wealth to equities in 2020 – a deviation of their usual behaviour of risk aversion during crisis years.

“The relatively stable economic climate of the late 1990s encouraged HNWIs to shed a hands-off approach and take on self-directed investments. They also became interested in maximizing tax product benefits and leveraging derivatives to limit exposure to currency, interest, and market risks. As the world entered the internet age, clients demanded access to online information and transactional capabilities,” the report read.

For the Asia-Pacific region, real estate tied with technology as the leading wealth driver of HNWIs in 2020. Elsewhere, however, technology is emerging to be the favoured investment sector of the ultra-rich.

According to the report, real estate surged in 2006 with global investments – including direct real estate and real estate investment trusts (REITs) – totalling US$900 billion. This is historically the strongest-ever performance by international real estate markets. Real estate allocations made up 24% of global HNWI portfolios in 2006, as alternative investments fell to 10%.

The subprime crisis then began in 2007, and real estate allocation fell drastically to 14%. It inched up to 18% in 2008.

“[This is] perhaps in anticipation of a recovery. After that, it remained within a stable 18% to 20% range until 2016, after which real estate fell slightly out of favour,” the report read.

On the other hand, technology-driven wealth heated up dramatically.

The report compared the wealth sources of the 400 most affluent individuals in the United States in 1993 and showed that only 7% of total wealth came from technology-related businesses in 1993.

By 1998, that share had shot up to 27%. And by 2020, technology was the most significant of all wealth sources at 29%, followed by finance and investments.

According to the report, the United States, Japan, Germany, and China continued as the top four HNWI population leaders, with their contribution increasing by 1.3 percentage points over 2019.

The top four markets, with each constituting more than 1 million HNWIs, made up nearly 63% of the total global HNWI population in 2020 – and were responsible for almost 84% of the global HNWI population growth.


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The Future of Hong Kong’s Investment Climate (Magazine)

Major Asian REIT Targets Premium Australian Real Estate (Australian Financial Review)