Movement of wealth becoming crucial in the property market: Knight Frank
The movement of private wealth across the world is critical in driving the performance of asset markets and, in particular, property, according to Knight Frank’s latest Wealth Report.
Some movements in wealth take the form of temporary investments while others, like migration, are more permanent.
And as these shifts grow in both frequency and magnitude, so too do their impacts and the extent of the reaction to them.
As with most global trends these days, if you want to understand the scale of wealth flows there is no better place to start than China, where a heady mix of stellar wealth creation and political and economic volatility has led to rising capital movement.
Capital outflows from China have been a constant since early 2014, prompted by a slowdown in the domestic economy, instability in local asset markets, a desire for diversification and the need for a hedge against depreciation as China sells dollars to support the yuan.
Property remains a substantial target for this outbound capital.
This is borne out by the findings of The Wealth Report Attitudes Survey, which confirm that 32% of UHNWIs will invest in offshore real estate in the next two years.
Chinese investment in US residential property, for example, has risen from barely US$300m in 2006 to over US$30bn in 2015, and now accounts for nearly one in every five foreign purchases.
As money moves at a faster rate, so government efforts to control its movement also gain momentum.
Once again, by way of illustration we need look no further than China where wealthy investors – officially limited to US$50,000 a year in offshore transfers – have become adept at maximising opportunities for converting money into other currencies.
The Chinese government reacted in 2016 by regulating access to casinos in Macau, a classic route for moving money, and limiting credit for card- holders travelling abroad.
In 2017 the authorities went further by tightening the rules regarding acceptable investments for offshore transfers – with property explicitly excluded.
Further restrictions seem likely, either formally via policy announcements, or informally through administrative processing.
But China is not unique in its efforts to restrict movement. Examples abound.
Foreign companies with direct property holdings in Russia are now obliged to file details with the authorities.
Since the start of 2016, Brazil has required the identification of natural persons who are the ultimate beneficial owners of newly registered entities.
And, as The Wealth Report went to press, the UK government was consulting on similar moves for foreign companies, mirroring rules introduced in 2016 for UK registered companies.
This growth in regulatory activity based on understanding where private wealth sits globally will surge further in 2017, ahead of the introduction of the OECD’s Common Reporting Standard (CRS).
The CRS is set to have a critical impact on wealth migration, heralding as it does the sharing of unprecedented amounts of financial data on foreign citizens between governments.
As we explore overleaf, this new reality is raising some searching questions on data and personal security and even potential investment and residency patterns.
Even money already held in offshore centres is not immune from greater oversight.
These are significant wealth pools: at the end of 2016, the store of private wealth held in offshore financial centres totalled around US$10 trillion.
Although only 1% and 6% of private wealth from the US and UK respectively is held in these centres, for the Middle East and Latin America the total is closer to 25%.
While the rate of growth in wealth held in centres such as Hong Kong and Singapore has averaged 10% annually in recent years, a rash of tax amnesties in preparation for CRS is persuading some investors to repatriate funds.
The Indonesian tax authorities’ amnesty on undeclared tax liabilities arising from foreign assets ran from July 2016 until March 2017, and is predicted to result in an outflow from Singapore in particular.
The Greek government has put forward plans for a tax amnesty covering funds held in Switzerland which would tax, legitimise and potentially lead to the repatriation of hitherto undeclared funds.
The Greek proposal comes in the wake of a similar amnesty announced by Italy in 2015, and is intended to discourage the flow of funds from Switzerland to other offshore jurisdictions ahead of the introduction of the CRS.
The past 12 months have also seen a rash of new rules that aim to control the destination of investment flows.
Three Australian states – Victoria, New South Wales and Queensland – have introduced an additional stamp duty surcharge for foreign buyers of residential property, in addition to the new 10% withholding tax on sales by foreign residents of high-value Australian property.
Elsewhere, we see a new capital gains tax for short-term property investments in New Zealand, the additional rate of stamp duty on high-value property purchases in the UK, and a new empty homes tax in Vancouver.
Clearly, the expansion of so-called “cooling measures” designed to control international wealth flows into property shows no sign of easing.
As The Wealth Report confirmed in 2016, migration of wealth can also take more enduring forms, with 16% of UHNWIs considering a permanent move overseas.
The latest data from Henley & Partners indicates that the world’s wealthy spend over US$2.4bn each year acquiring new nationalities.
Demand is highest from China, Russia and the Middle East, with around four-fifths of US EB-5 visas going to Chinese nationals.
The cost varies considerably, from a few hundred thousand dollars in some Caribbean islands to US$1m and more for citizenship in Cyprus and other European locations.
In the context of continued rising demand for overseas property, the fact that such schemes offer property as an investment route is a powerful draw.
Even here though, pressure from regulators is for rule change to reduce or even prohibit demand for property altogether (see reforms in the UK and Singapore by way of example).
Inevitably, this will have a dampening effect on demand for these particular schemes.
The overriding impression left by any analysis of global wealth flows is one of flux.
Nevertheless, there are two constants: first, ever growing demand from the wealthy to move their money into safe havens; and second, the corresponding determination of governments to exercise control over that process.
Evidence to date suggests that while wealth flows can successfully be corralled and redirected, they will not be curbed.