Gulf investors eye property in West

Millionaires in the Middle East are looking at real estate and fixed-income instruments globally this year and the next to overcome the worst year for investments, a senior investment banker said yesterday in Dubai.

"Commercial real estate in the US and Europe have already witnessed some fund flows from high and ultra high net worth individuals in the Middle East," Amir Sadr, Head of Middle East Wealth Management at Merrill Lynch, said yesterday in response to a question by Emirates Business.

"Certainly fixed-income instruments are also attracting interest. We've seen quite a bit of flow into bonds, which are delivering yields of up to eight per cent. There is especial interest in local paper, such as the Abu Dhabi Government bonds."

Sadr was presenting the findings of the World Wealth Report 2009 released by Merrill Lynch Global Wealth Management and Capgemini. The report shows the number of millionaires in the region dropped by six per cent to 400,000 compared to a global decrease of 15 per cent to 8.6 million. Their combined net worth fell by 16.2 per cent to $1.4 trillion (Dh5.14trn) as part of a global fall of about 20 per cent to $32.8trn.

A meltdown in asset prices in Asia and Europe resulted in a 12.7 per cent decrease in the number of millionaires in the UAE in 2008 compared to the previous year. Local factors that contributed to the fall were a 43.1 per cent drop in the UAE's market capitalisation and a "dramatic decline" in real estate capital values and rents.

"Middle Eastern millionaires are still spending money," Sadr said. "High and ultra high net worth individuals are very savvy and sophisticated people. When asset prices drop, they see this as an opportunity."

No region ended 2008 unscathed, wiping out two robust years of growth. The most significant declines in high net worth individuals (HNWI: those whose net worth is more than $1 million) and ultra high net worth individuals (UHNWI: with $30m or more) numbers and wealth occurred in the three largest regions: North America, Europe and Asia Pacific.

UHNWIs suffered more extensive losses in financial wealth than the HNWI population as a whole. Consistent with the drop in the UHNWI population, the group's wealth decreased 23.9 per cent.

In 2008, the US, Japan and Germany still accounted for 54 per cent of the world's HNWI population, up slightly from 2007, and China and Brazil moved into the top 10 rankings.

"This year's World Wealth Report shows a distinct shift from our reports in recent years," said Bertrand Lavayssière, Managing Director Global Financial Services, Capgemini.

"After a year of significant volatility, we're seeing a shift in HNWI activity and priorities. There are currently opportunities for wealth management firms and advisors to understand and effectively address increased client concerns by helping to navigate through the uncertain economic times and build relationships that will continue well into the future."

Despite the negative results of 2008, however, the report forecasts that by 2013 HNWI wealth will grow at a compounded annual rate of 8.1 per cent to $48.5trn with Asia Pacific overtaking North America as the largest region by wealth.

"In 2008, the number of HNWIs declined by roughly 14.9 per cent to 8.6 million – this is below the 2005 level. This is not surprising given the near-50 per cent plunge in global equity-market capitalisation and global GDP," Sadr said.

HNWIs retrenched further to safer, more familiar grounds in 2008, including both markets and asset classes. "We saw this trend to safer investments begin in 2007. HNWIs sought refuge in traditional investment vehicles like cash and deposits, and fixed-income securities, with a six per cent increase over 2007." These investments now make up 50 per cent of HNWI portfolios globally.

Fixed-income allocation rose two per cent while cash and deposit-based investments rose four per cent. The proportion of portfolios to real estate increased four per cent from 2007, totalling 18 per cent of overall HNWI portfolios globally.

"This was a result of various factors including rebalancing of portfolios as well as an overall decrease in real-estate prices," Sadr said.

Residential real estate allocation comprised 45 per cent of total property investment, with the second highest allocation to commercial property (28 per cent). Allocations within alternative investments also shifted, with a movement away from hedge funds, and increasingly to areas such as commodities, and simpler structured investments – as another means to preserve capital, the report said.

HNWIs also continued their retrenchment back to home-region and domestic investments. All regions dramatically increased their allocation to domestic investment in 2008, with an average global increase of 6.8 per cent, continuing the trend that began in 2006.

"There were no safe havens in 2008 – not even cash. In a major recession, even cash loses value.

"The global financial crisis severely affected the financial sector in North America and slowed growth significantly. In the United States, real GDP growth dropped to 1.1 per cent 2008, from 2.0 per cent in 2007. The housing crisis continued, with a 19.5 per cent drop in housing prices. The US registered a 18.5 per cent drop in HNWI population, while Canada registered a 24.1 per cent drop," Sadr said.

In Europe, he cited the lack of global demand, coupled with the financial crisis, which led to a severe downturn across the region. The deleveraging process towards the end of 2008 in Latin America "significantly affected the region", wiping out the benefits from the commodity rally during the first half of the year, Sadr said. "During 2008, millionaires retreated to their domestic markets. Pre-2008, they were invested in other markets, but when they saw how things were moving, they went back to investing in the things and places they knew best."

He added: "Investors in the Middle East usually take a little more risk than in other regions. As investment advisors, we see a large amount of uncertainty among our clients in the region. But we also have a lot of optimism in the GCC."


Stabilisation and improvement

"In 2009, we don't think that everything will go back to the 2007 level. But we do feel that things are beginning to improve. Stabilising to positive – that's our view," said Sadr of Merrill Lynch.

Within the region, the UAE Central Bank has been "very decisive" in terms of stimulus packages, and "that is encouraging us", he said. The investment bank also sees a lot of optimism in Saudi Arabia. "The Kingdom is one of the few places where, although they have lost a lot of money in the stock markets, the perception of the underlying economy is still very strong."

Saudi Arabia witnessed higher GDP growth in 2008 – 4.2 per cent compared to 3.4 per cent in the previous year – and "that is remarkable", Sadr said.


Impact on investments of passion

The financial crisis and economic uncertainty clearly had an impact on HNWI (high net worth individual) investments of passion and lifestyle spending, with luxury goods makers, auction houses and high-end service providers reporting significantly reduced demand worldwide.

Outright global demand was weaker for passion investments, such as luxury collectibles (automobiles, yachts and jets), art and jewellery, and lifestyle spending (on health/wellness, luxury travel and luxury consumables such as designer handbags, shoes and clothes).

However, HNWIs did gravitate to art and jewellery as investments of passion, increasing their pre-crisis levels to these categories, as an additional means of "flight to safety" – with the idea that these passion investment categories may hold their value better in the long term, the World Wealth Report said.

Luxury collectibles remained the primary HNWI passion investment in 2008 while fine art attracted HNWI buyers seeking tangible value, the report said. Allocations to other collectibles (such as wine, antiques, coins and memorabilia) and sports investments (in teams, race horses) held steady with pre-crisis levels.

Lifestyle spending rose on health/wellness, but dropped on luxury travel. And the recession took its toll on philanthropy, especially in the second half.

Sixty per cent of North American HNWIs said they would be giving less in 2009 due to the economic downturn.

Japan was the only country that forecast a growth in charitable donations, with 54 per cent of HNWIs saying they plan to give more in 2009.

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