The Wealth Report 2012: Key Findings on the Movement of Wealth Globally

The Wealth Report 2012, published in March 2012, pulls together all the relevant strands of wealth creation, from property and economic trends to the political risks associated with doing business in the global recession, and explains their connections and their implications for the global movement of wealth.

There is a central theme running through the content that links the performance of prime residential and commercial property with wealth creation and economic and political risk.

Over the past year there has been a revival in global wealth portfolios. In 2011, according to exclusive data provided by Ledbury Research, there was a seven per cent rise in the number of people with more than US$100m in investable assets globally.

Over the next five years the number of individuals with this level of wealth is forecast to rise by a further 37 per cent, an additional 23,000 people worldwide - the majority of whom will be in emerging markets.

What happens at this level of the wealth scale reflects what is happening lower down. For example, the number of South-East Asians with wealth of US$10m or more already outnumbers those in Europe, and will overtake the US in three years.

A more stark illustration of the shift in the balance of power from west to east has been provided by Professor Danny Quah from the London School of Economics, who calculated the world’s economic centre of gravity, as measured by GDP.

In 1980 the centre was somewhere in the mid-Atlantic. As we move to 2012 and beyond, the centre shifts eastwards until, by 2050, the centre should sit somewhere between China and India.

So wealth creation and concentrations are shifting east. But this simple narrative becomes more complex when we look at the figures at a country by country level.

In this year’s Wealth Report, William Buiter, Citi’s Chief Economist, discusses his theory of the ‘Global Growth Generators’ or 3Gs. This theory points to a much wider range of countries and locations on the rise in economic terms.

His research confirms the rapid growth of locations like Nigeria, Iraq, Mongolia and Egypt – all of which will be big potential exporters of wealth and investment.

But while these locations promise big growth, this growth is coming from a very low level.

When we look at projections for GDP per capita, the top 10 nations in 2050 are forecast to contain a relatively strong showing from the West.

This fact confirms an important issue highlighted by Bernard Fornas, the CEO and President of Cartier. In his interview in this year’s report he stated: “Why should the rise of a new power imply automatically the decline of another?”

Let’s look at that assertion in a different way. When we asked Citi Private Bank’s wealth advisors to name the cities that mattered most to them – in terms of a place to do business, for lifestyle, for education etc - the key western hubs – London, New York and Paris topped the table

When we asked the same panel to look ahead and forecast the position 10 years hence, Sao Paulo has appeared, and Beijing and Shanghai have risen rapidly up the table, but right at the top London and New York are still hanging in there.

How do we explain this robust forecast for the West’s key cities?

In this year’s report, there are some key explanatory factors, contained in the results of our annual Prime International Residential Index (PIRI).

This index is the centrepiece of the Wealth Report, and covers price movements in over 70 global prime markets.

Four key themes emerged this year:

Firstly, emerging market wealth is influencing performance far and wide.

Secondly, price falls in some of Europe's luxury markets point to the ongoing impact of the global financial crisis.

The third issue is the unravelling of price booms in Asia.

Finally - as luxury property investments become ever more globalised, so the issue of political risk has risen in importance – and has promoted the concept of the safe-haven investment location.

Let’s explore the first and last of those issues – emerging market wealth and safe-havens.

The problem in so many emerging-world countries is governance.

The newly wealthy become aware of the potential impact of corruption and arbitrary rule change on their ability to protect their wealth.

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, where they invest their wealth, and even where they locate themselves and their families.

This process means wealth is transferred from the emerging markets to the West – but particularly the UK, US, Canada, Australia and Switzerland.

As you can see here the impact has been dramatic.

Double digit property price rises in Miami – a target for new Brazilian wealth, Vancouver – a target for Chinese wealth, and London – a target for pretty much everyone.

Next to consider is probably the biggest global property story at the moment - the potential for a serious Asian property crash.

This concern over Asian market performance is hardly surprising.

China’s housing market alone arguably forms the single most important sector in the entire global economy.

In 2011, China's construction sector accounted for 13 per cent of its GDP, and was the consumer of 20 per cent of all global steel, iron, copper and cement production.

In short, the performance of China’s housing market matters.

The fact is property prices are falling in lots of locations in Asia-Pacific.

But we shouldn’t be too surprised.

The falls follow a huge boom over the past two years.

Prime Shanghai prices might have fallen three per cent in 2011, but they are still 40 per cent higher than they were in early 2009.

In addition, the Chinese, Hong Kong and Singapore governments have made a concerted effort to halt price growth – through cooling measures – such as limits to mortgage lending and sharp increases in property taxes.

To confirm that point, the location in Asia with the biggest price rise last year, Jakarta, is one market where there have been no attempts by the government to limit price growth.

As I stated at the outset, the issue of political risk is acting to push wealth across the world, especially from emerging markets to developed markets.

There is a flip side to this.

The boom in luxury property prices in central London, New York and, until recently, Paris, has taken place against a backdrop of economic austerity in the wider Western economy.

So while mainstream Western property markets are struggling to cope with economic deleveraging and weak economic performance, the adjacent prime markets are able to draw on new wealth being generated in the emerging world.

This fault line has fuelled the stamp duty rise in the UK, the focus on wealth taxes in the US, and also the recent referendum on second home ownership in Switzerland.

And now this same issue is spreading to the centre of the emerging world – China – where a lack of market affordability is encouraging policy makers to try to limit price growth.

While I think it would be wrong to overlook the current political disquiet about the distribution of wealth, equally I think it would be wrong to be too concerned – the wealthy are unlikely to be barred entry to global property markets.

The agonising in the UK over the mansion tax and finally the stamp duty changes is a case in point – politicians’ recognise there are limits to their ability to control capital flows.

This year our research work has confirmed that the level of private wealth allocated to the global commercial property market will rise from around US$42bn in 2009 to hit more than US$74bn this year.

And, when we look at residential investment, a majority of respondents, 57 per cent, confirmed they were planning to increase their exposure to the sector this year.

In lots of luxury housing market, certainly in London, we have had three years of upside since the 2008 crash; prices and demand have boomed.

But, at the same time, the political reaction to sharp divides in wealth has become more aggressive, certainly more complicated.

Which makes it harder for investors to plan for asset allocation.

In the report I comment, that “five years after the beginning of the financial crisis, we are still some way off a final political settlement over the tax treatment of wealth and in particular the tax treatment of property.”

I wonder actually, whether over the past few weeks, in the UK, and certainly in the US, that as the economic recovery begins to look a little more sustainable – whether the centre of the political debate isn’t beginning to move away from the treatment of existing wealth and on to the promotion of new wealth creation.

Potentially we are moving into a more stable regulatory phase for wealth and property.