_The evolution of wealth trends across the globe

Wealth continues to grow at pace. The number of ultra-wealthy individuals with net assets of over US$50 million rose by 10% last year according to Wealth-X data prepared exclusively for our latest Wealth Report. This marks a noticeably stronger rate of expansion than in the previous five years, which recorded a cumulative 18% increase.

Where will the money come from next?

The next five years is expected to see a continuation of this recent return to growth, with the global population of ultra-wealthy forecast to rise by 40% over the period.

This expansion in the population of UHNWIs will continue to be driven by North America, which will remain the world’s largest wealth region; here, growth over the next five years is expected to be 38%, taking the population to just under 60,000. However, Asia is catching up rapidly and the 55% increase expected over the next five years will continue to narrow the gap with the US.

Indeed, despite a much-improved rate of growth in Europe last year, the region narrowly lost its second-place position to Asia in 2017. And with China expected to double its population of ultrawealthy individuals by 2022 and strong growth in Japan (+51%), India (+71%), Indonesia (+66%) and Malaysia (+65%), it will now start to pull away from Europe.

At a country level, the US continues to dominate across all wealth bands, with a particularly significant dominance in the demi-billionaire space (US$500 million+), with 1,830 individuals versus the nearest closest region, China Mainland, at 490. This dominance will continue as far ahead as 2022, with the US forecast to remain the key driver of global wealth accumulation at 36% growth overall.

However, this may prove to be conservative if the recent changes to corporation tax encourage more investment across the US. And while Europe has been overtaken by the continued momentum of Asia, the next few years will see a much-improved rate of growth than the previous five years as the economic position improves. Therefore, expect Europe to be a more important part of the capital flows landscape than in the recent past.

Where is this private capital heading? 

A key focus of The Wealth Report is to identify sources and destinations of private capital. This year, for the first time, the report included analysis of newly released data from the Bank of International Settlements (BIS) on the level of foreign deposits by “non-banks” in their financial institutions.

This provides a unique perspective on the movement of money around the globe and helps us to understand shifting capital flows that are likely to have an influence on real estate markets.

In particular, it paints a picture of a very active flow of capital around the world, with foreign non-bank deposits rising by US$97 billion in the year to June 2017 in the 29 locations that provide detailed reporting.

As has been widely noted in the direct real estate markets, the movement of Chinese capital has been increasing rapidly. This is reflected in the BIS data, with Chinese funds deposited in reporting locations (i.e. outside China) rising by US$172 billion over the three years to June 2017.

Interestingly, the impact of Chinese government policy can also be seen in the data, with Macau recently seeing a decline in deposits (down 10%) over the 12 months to June 2017, while Hong Kong has become increasingly popular with Chinese investors, up by US$19.5 billion in the same period.

Indeed, the impact of legislation is becoming an increasingly important factor in the global movement of money. The introduction of the OECD-inspired Common Reporting Standard (CRS), launched in September 2017, for example, looks set to be a key influence on global capital flows over the next few years. The BIS data appears to show that countries not signed up to this regulation are attracting significant inflows.

In particular the US, a well-recognised global safe haven which has not adopted the CRS, saw nonbank deposits increase by US$122 billion over the three years ahead of its implementation, with a rise of US$90 billion in the 12 months to the end of June 2017 alone.

At the same time, commentators point to other traditional low-tax jurisdictions whose attractiveness is being eroded by the CRS and other transparency measures. Bahamian non-bank deposits fell by 25% in the last year for example, while deposits held in the Channel Islands also declined, with a 31% fall in Guernsey.

Growing complexity

The continued appetite for moving money and increasing investment cross-border shows no signs of abating. At the same time, governments are increasingly looking to monitor, if not influence, these flows.

As well as the requirement for investment diversification, as investors become fully exposed to their local markets, there is an increasing number of regulatory reasons for this capital to move.

These include: the impact of capital controls on money movements out of countries such as China and India; the taxes on foreign buyers increasingly being implemented in a number of jurisdictions; the drive for more transparency by governments; and the attractiveness to some nationalities of swapping foreign direct investment in return for citizenship.

Add in a push for more global tax revenue to be “on-shored” rather than held outside domestic tax regimes, plus the possibility of trade wars, and we expect capital to continue to move around the world at speed.

Future trends in capital movements

This strong rate of wealth creation and accumulation will drive increasing demand for real estate investments through both direct asset purchases and also indirectly via deposits in pension funds, insurance vehicles and savings products.

Indeed, as we discuss in our article on so-called megafunds, the strong growth in wealth accumulation plus the increasing ability of the asset management industry to capture a share of this growth is driving significant increases in assets under management and a rising requirement for real estate as part of these funds.

Over the next year we expect to see:

Increasing attractiveness of the US

Strong local wealth accumulation will support domestic demand for real estate and more of this capital may stay on-shore over the next few years. In addition, the BIS data shows just how attractive the US is currently to global depositors.

We expect further increases in inflows from overseas depositors into the US, with positive economic growth and rising interest rates being supported by changes to the domestic tax regime that could also lead to a rise in foreign direct investment and, as the incentives for profit shifting are changed, more capital and intellectual property being repatriated that was previously being held offshore.

European renaissance

Expect the continued resurgence of strong buying activity from private European buyers as wealth growth momentum returns. Over the last year we have noted a new wave of European capital looking to invest outside their traditional markets, including many that are looking overseas for the first time, and expect this trend to gather momentum.

Asian expansion

Asian buyers continue to make waves on the world stage as wealth is amassed at pace. Capital controls may temper direct real estate buying by Chinese capital, as we have seen in the US in 2017, but the long-term trend remains one of global expansion, and other parts of Asia, such as Japan, Singapore and Malaysia are in expansion mode.