KNIGHT FRANK’S PRIME INTERNATIONAL RESIDENTIAL INDEX (PIRI) HAS PROVIDED A UNIQUE MONITOR OF PRICE CHANGES ACROSS THE WORLD’S LUXURY PROPERTY MARKETS SINCE 2007. ACCORDING TO LIAM BAILEY, THE LATEST RESULTS POINT TO THE INCREASING INFLUENCE OF POLITICAL AS WELL AS ECONOMIC DRIVERS
Although it might seem counterintuitive, the price performance of the prime property markets favoured by HNWIs was far from uniform last year, despite the population of these wealth creators increasing or remaining constant in all world regions.
The gap in annual price growth between the top and bottom of our PIRI table was 45%. The majority of locations covered in the survey saw flat or falling prices and, ironically, some of the largest price drops were in areas with the strongest economic growth.
Emerging markets influenced performance far and wide, with wealth flows to the developed world's property hotspots driving growth in Miami, London and Vancouver. Meanwhile, price falls in some of Europe's luxury markets point to the ongoing impact of the global financial crisis; similar falls in Singapore, Sydney and Shanghai confirm the unravelling of price booms in Asia.
Explanations for these trends start to emerge when the findings from the 71 locations tracked by PIRI are examined more closely. These trends, along with some of their potential long-term consequences, together with the detailed results taken from this year’s annual PIRI survey.
As wealth creation and luxury property markets become ever more global, so the issues of exchange rate volatility, political risk and security concerns rise in importance for HNWIs, competing with more prosaic motives such as investment and lifestyle. This has led to the hand-in-hand growth of capital flight and the concept of the safe-haven location.
Of all the luxury market trends that have played out since the launch of The Wealth Report five years ago, it is the growth of global wealth flows that has done most to shape the leading prime markets. When asked which nationalities will become most important as prime property buyers over the next five years, Chinese, Russian, Middle Eastern, Latin American and those from other growth economies consistently top advisors’ lists.
|Top nationalities now
|Nationalities growing in importance
|Nationalities to watch
The problem in so many emerging-world countries is governance. The newly enriched become aware of the potential impacts of corruption and arbitrary rule changes on their ability to plan for inter-generational wealth transfers. In extreme cases, as wealth steadily increases, so too do the perceived risks from falling out of political favour.
Charles Douglas, a London-based property lawyer specialising in transactions for HNWIs, says 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 and invest their wealth. Look at London – the angst in the wealth and property industry over higher tax rates and new levies on property has been almost entirely misplaced. The reality is that tax is only part of the picture for the super-rich: what they really value is the lifestyle that comes with an open, cosmopolitan environment, excellent education for their children and both personal and property security,” Mr Douglas says.
Paradoxically, while wealth creation is booming in the emerging world and the developed world is mired in debt and austerity, the markets that have benefited from the emerging world’s largesse have largely been those in Europe and North America. The fact that so many topend properties from Monaco to Miami are being bought with wealth from the BRIC (Brazil, Russia, India and China) nations and beyond confirms the simple transfer of economic power that increases every year.
Miami, where prime property values rose 19% last year, is a good example of a location that experienced double-digit growth in 2011 on the back of HNWI capital flight, favourable exchange rates and value for money after a sharp fall in prices during the credit crunch. According to our Global Cities Survey, Miami is now viewed as one of the world’s most important cities by Latin American HNWIs. New York has experienced a similar process to that seen in Miami, with an influx of overseas money pushing prices ever higher. “The Chinese market opened up rapidly in 2011 with buyers from there joining other wealthy investors in targeting the $1m-$3m Manhattan market,” says Jonathan Miller, Head of New York property analyst Miller Samuel. Up to a third of Manhattan’s prime market sales are now going to foreign buyers.
With many of Asia’s entrepreneurs being paid for their products in dollars, US property is an obvious destination for their profits, a trend that is also being observed in commercial markets.
However, Manhattan’s performance in the second half of 2011, when price growth slowed noticeably after weaker activity on Wall Street, highlights how Western markets, even those attracting capital from overseas, are still vulnerable to weak domestic economies. While the financial sector represents 5% of New York employment, it accounts for 25% of all personal income. Indicators point to more testing conditions in the city’s prime market over the next year.
Across the Atlantic, many of Europe’s most established prime locations are already feeling the pinch. Monaco can still comfortably claim the most expensive real estate in the world, but prices there, along with the French Riviera, fell in 2011, in part confirming the impact of the eurozone crisis on market performance. It is no coincidence that the only two European cities in our PIRI that recorded price increases last year were London and Zurich – both outside the eurozone.
London’s prime housing market is seemingly powered by capital flight from the whole globe. The city, which once again topped The Wealth Report’s annual ranking of the urban centres considered to be the most important by HNWIs, attracted flight capital from not only the world’s fastest growing economies, but also from eurozone sovereign debt bad boys such as Greece and Italy.
But not all safe-haven locations are in the Western world. The startling performance at the top end of Kenya’s housing market is a particularly interesting example of this. Price growth in both the Kenyan capital Nairobi and the country’s Indian Ocean coastal hotspots outstripped all other PIRI locations, with Nairobi property chalking up a 25% increase last year.
“Safe haven” isn’t necessarily a phrase many people would use to describe the country in a global context, but compared with many of its neighbours it is just that, according to Ben Woodhams, Managing Director of Knight Frank Kenya. He says that Kenya’s rapid economic development is attracting domestic and international private equity, with particular growth in remittances flowing from Kenya’s increasingly affluent diaspora. However, recent events such as the kidnapping of tourists staying on the north coast and a sharp rise in interest rates to almost 25% also highlight the potential vulnerability of some emerging prime markets.
Many of Europe's most established prime locations are already feeling the pinch, confirming the impact of the eurozone crsis on market performance
New Zealand’s isolation from the world’s conflict zones makes it possibly the ultimate safe-haven destination, and this has been reflected in property prices. Layne Harwood, Managing Director of Knight Frank New Zealand, says last year’s 5% rise in prime Auckland prices was due to an increase in Asian buyers, particularly from China and Singapore, looking for security and stability.
ASIAN MARKET CONCERNS
While capital flight from emerging economies to safe havens has been integral to the performance of the world’s luxury housing markets, the story that grabbed the media’s attention in 2011 was the potential for a Chinese property crash. Price falls in Singapore, Sydney and Shanghai – tellingly among the fastest growers in last year’s PIRI survey – confirm the unravelling of speculative price booms in Asia Pacific.
This concern is hardly surprising. China’s housing market arguably forms the single most important sector in the entire global economy. In 2011, China's construction sector accounted for 13% of its GDP, 20% of global steel production, and was the dominant consumer of the world’s iron, copper and cement. The performance of China’s housing market matters.
While mainstream prices have been falling across the “tier-one” Chinese cities, the prime markets have fared slightly better, although growth is slowing. Prices in Beijing’s luxury sector, for example, rose by a healthy 8% in 2011, but this was largely due to a strong performance in the first half of the year.
We shouldn’t be overly surprised that prices are falling in some of Asia’s prime markets; the falls follow huge booms over the past two years, as illustrated by our five-year trend graphs. “Shanghai prime prices might have fallen 3.4% in 2011, but they are still 37.5% higher than they were in early 2009,” says Thomas Lam Ho Man, Knight Frank’s Head of Research for Greater China. In addition, the Chinese government has made a concerted effort to halt runaway price growth. This objective confirms two key issues that will become more and more important for future performance in the prime residential market.
The first is the political reaction to a widening imbalance in the distribution of wealth in China. As well as the potentially destabilising economic effects of rapid price growth, the Chinese government has become increasingly worried about rising popular discontent as housing affordability becomes an issue even for the country’s middle classes.
The second issue – something I have highlighted in previous editions of The Wealth Report – is China’s increasingly confident use of policy levers to attempt to set prices in an ostensibly free market. Much has been made recently of the rise of state capitalism. In China’s housing market an unusual mix of private and state control is creating something of a “planned market” for housing. It is a policy that has been exported in varying degrees to Singapore and Hong Kong.
Unsurprisingly, the attempt to control prices in China has seen investors switch their focus to commercial property markets and also to the prime residential market in Hong Kong. Mainland Chinese buyers now make up 25% of prime market purchases in Hong Kong, where prime apartment prices rose by a further 4.6% in 2011, compounding the 60% growth seen since the beginning of 2009.
In India, meanwhile, the government has not had to resort to specific cooling measures to check the growth of the country’s burgeoning prime residential markets; weaker economic conditions and high inflation, with a concomitant decision by the Bank of India to raise interest rates 13 separate times in 2011, contributed to prices in Mumbai falling by more than 18% last year.
India’s prime market is unusually vulnerable to internal economic events because the country’s strict limits on foreign buyers removes the potential safety net provided by inward capital flows from overseas buyers. Elsewhere in the Asia-Pacific region, prime Australian prices have also slipped as affordability becomes an increasing constraint.
But weaker price performance is not the whole story of Asia's prime residential market. Knight Frank Indonesia’s Fakky Hidayat points out that Jakarta’s strong performance in 2011, up by over 14%, resulted from the steady growth of Indonesia’s domestic economy. However, a lack of clarity over new anti-money laundering regulations being introduced in March this year could cause uncertainty in 2012, he adds.
Around the world, tight supply has been a factor in several markets, helping to limit price falls. For example, in Barbados and the British Virgin Islands (which saw -5% and 0% price changes respectively), geographical constraints and development policies have restricted development. Similarly in Moscow, a series of new planning restrictions in the city’s central zone helped to push prices higher in 2011 by nearly 10%.
This imbalance between demand and supply has acted to limit price falls and has even supported growth among the world’s luxury ski resorts. Though strict growth controls apply in Aspen, Colorado, Brian Hazen of local real estate agent Mason Morse reports that the number of sales rose 15% in 2011. The deals included 13 properties worth $10m, up from eight in 2010.
In Europe, Matthew Hodder-Williams, Head of Knight Frank’s French Alps desk, confirms that while Courchevel prices remained unchanged in 2011, this disguised a healthy increase in demand. “Courchevel 1850 is the Alpine destination of choice for buyers from Switzerland, the UK, Russia and Italy, but supply still remains very limited,” he says.
For international buyers the lack of supply across Switzerland is unavoidable in this partially closed market, a factor that is not limited to the ski resorts. Limited availability in Zurich has pushed prime prices higher by 3% over the past year.
Zurich’s performance has been aided by low interest rates, with five-year mortgages hovering around 1.5%. It seems unlikely that the Swiss National Bank will raise them any time soon as it battles to stop the Swiss franc rising against the euro.
Zurich’s experience following the intervention of Switzerland’s central bank is reflective of the growing influence that currency movements are having on price performance, which has become an ever more critical issue for individual housing markets. London’s 40% rise in prices since the start of 2009 results, in part, from the 30% devaluation of sterling in late 2008 that made property in the UK capital very attractive to overseas buyers. The long-predicted slide in the value of the euro, which for a long time seemed to defy economic logic, means prime markets in the US and UK will, however, no longer offer such value for money for flight capital leaving the eurozone.
Citi Private Bank’s EMEA Head of Forex, Michael Schmeja, says wealthy investors are increasingly using currency-hedging strategies when buying property: “This is a significant development from even two years ago, and with the imbalances in the global economy continuing we have to expect more attention to this issue.”
On a broader social level, one of the ironies of the boom in luxury property prices in central London, New York and, until recently, Paris, is that it has taken place against a backdrop of turmoil and austerity in the wider Western economy. This juxtaposition has fuelled growing disquiet in some quarters, as evidenced by the focus on wealth taxes in the run up to this year’s US presidential election. Meanwhile, in Israel, the perceived impact on affordability caused by wealthy foreign purchases of second homes in Tel Aviv, where prime prices rose a further 8% last year, has become a serious political issue.
Returning to Miami, we can see a classic example of a growing fault line, where emerging-world wealth, which has driven luxury house prices sharply higher in recent years, is rubbing up against a very different world of distressed sales and foreclosures.
While the mainstream Western property markets struggle to cope with a new reality of economic deleveraging and sickly economic performance, the adjacent prime markets appear able to draw on new wealth being generated in the emerging world. The risk for the prime markets is that, five years after the start of the current financial crisis, there is still no political settlement in the West regarding the treatment of taxation and property wealth. And now this same issue is spreading to the centre of the emerging global economy, China, where a lack of market affordability and accessibility is raising the spectre of political risk from a widening gulf in wealth.
As this year’s PIRI results clearly show, the narrative surrounding global luxury property markets has become a lot more complex in recent years. Against an everwidening backdrop of influences we have got to expect growing volatility and divergence in performance.
Average Price Change
||2011 Price Change
|1 ||Nairobi ||Kenya ||25.0%|
|2 || Kenyan Coast || Kenya || 20.0%|
|3 || Miami || US || 19.1%|
|4 || Bali || Indonesia || 15.0%|
|5 || Jakarta || Indonesia || 14.3%|
|6 || London || UK || 12.1%|
|7 || Vancouver || Canada ||10.4%*|
|8 ||Moscow ||Russia ||9.8%|
|9 ||Toronto ||Canada || 8.5%*|
|10 ||Beijing ||China || 8.1%|
|11 ||Tel Aviv || Israel ||8.1%*|
|12 ||Bangkok || Thailand || 6.1%|
|13 || Kiev || Ukraine || 5.4%|
|14 ||Hong Kong (apartments) ||China ||4.6%|
|15 ||Auckland || New Zealand || 4.5%|
|16 || St Petersburg || Russia || 4.0%|
|17 ||New York (Manhattan) || US ||3.1%|
|18 ||Zurich || Switzerland ||3.0%|
|19 ||Meribel ||France (Alps) ||3.0%|
|20 ||Los Angeles ||US ||2.5%*|
|21 ||Cape Town || South Africa ||2.4%|
|22 ||Phuket || Thailand ||1.7%|
|23 ||Aspen ||US (ski) || 1.0%|
|24 ||Rome ||Italy ||0.0%|
|25 ||Vienna ||Austria ||0.0%|
|26 ||Brussels ||Belgium || 0.0%|
|27 || Amsterdam || Netherlands || 0.0%|
|28 || Cyprus || Cyprus || 0.0%|
|29 ||Sardinia || Italy || 0.0%|
|30 ||Marbella || Spain || 0.0%|
|31 ||British Virgin Islands || Caribbean || 0.0%|
|32 || Cayman Islands || Caribbean || 0.0%|
|33 || St Barts ||Caribbean || 0.0%|
|34 ||Venice ||Italy ||0.0%|
|35 ||Val d’Isere || France (Alps) || 0.0%|
|36 ||Courchevel 1850 ||France (Alps) || 0.0%|
|37 || Chamonix ||France (Alps) || 0.0%|
|38 ||Megeve ||France (Alps) || 0.0%|
|39 ||Verbier || Switzerland (Alps) || 0.0%|
|40 || St Moritz || Switzerland (Alps) || 0.0%|
|41 ||Gstaad || Switzerland (Alps) ||0.0%|
|42 ||Revelstoke, Calgary || Canada (ski) || 0.0%|
|43 ||Christchurch ||New Zealand || -0.5%|
|44 ||Washington DC || US || -1.2%|
|45 ||Barcelona ||Spain ||-1.8%|
|46 ||Paris || France || -3.0%|
|47 ||Dubai ||UAE ||-3.0%|
|48 ||Shanghai ||China ||-3.4%|
|49 ||Madrid ||Spain ||-4.4%|
|50 ||Singapore ||Singapore || -4.7%|
|51 ||Geneva || Switzerland ||-5.0%|
|52 ||Tuscany ||Italy ||-5.0%|
|53 || Barbados ||Caribbean ||-5.0%|
|54 ||Cap Ferrat ||France ||-5.0%|
|55 || St Tropez || France ||-5.0%|
|56 ||Provence || France ||-5.0%|
|57 ||Telluride, Colorado ||US (ski) ||-5.0%|
|58 ||Florence ||Italy ||-5.0%|
|59 ||Umbria ||Italy ||-5.0%|
|60 ||Kuala Lumpur ||Malaysia ||-5.6%|
|61 || Lake Como ||Italy ||-7.0%|
|62 ||Western Algarve ||Portugal ||-7.0%|
|63 ||Cannes || France ||-8.0%|
|64 ||Sydney ||Australia ||-9.0%|
|65 || Monaco ||Monaco ||-10.0%|
|66 || Milan ||Italy ||-10.0%|
|67 ||Mallorca || Spain ||-10.0%|
|68 ||Mustique || Caribbean ||-10.0%|
|69 ||Dordogne ||France ||-10.0%|
|70 || Mougins ||France ||-10.0%|
|71 || Mumbai ||India ||-18.1%|
* Q3 2010 to Q3 2011
All data from Knight Frank’s global network other than: Barcelona
– Lucas Fox; Aspen – Mason Morse; Revelstoke – Sotheby’s
Realty; Telluride – Telluride Properties
Average Price Per SQ M
||$ per sq m Q4 2011
|1 || Monaco ||58,300|
|2 ||Cap Ferrat ||51,800|
|3 ||London ||48,900|
|4 ||Hong Kong* ||47,500|
|5 ||Courchevel 1850 ||44,000|
|6 ||St Moritz ||42,600|
|7 ||Gstaad ||39,900|
|8 ||St Tropez ||38,800|
|9 ||Geneva ||31,900|
|10 ||Hong Kong** ||28,300|
|11 ||Paris ||27,200|
|12 || Cannes ||25,900|
|13 ||Singapore || 25,600|
|14 ||Moscow ||24,000|
|15 ||Sardinia || 24,000|
|16 || Zurich ||23,900|
|17 ||New York (Manhattan) ||23,300|
|18 ||Sydney ||22,400|
|19 || Val d’Isere ||22,000|
|20 ||Meribel ||21,400|
|21 ||St Petersburg || 20,200|
|22 ||Shanghai ||19,600|
|23 || Mustique ||19,400|
|24 || Verbier ||18,700|
|25 || Rome ||18,100|
|26 ||Beijing || 17,400|
|27 ||Megeve ||15,500|
|28 ||Vienna ||14,200|
|29 || Amsterdam ||12,900|
|30 ||Mougins ||12,900|
|31 ||Florence ||12,300|
|32 || Mallorca ||11,900|
|33 ||Lake Como ||11,700|
|34 ||Marbella ||11,700|
|35 ||Venice || 11,700|
|36 ||Mumbai ||11,400|
|37 ||Milan ||11,000|
|38 ||Cayman Islands ||10,800|
|39 ||Aspen ||10,500|
|40 || Chamonix ||10,400|
|41 ||Madrid ||10,100|
|42 ||Barbados ||9,700|
|43 ||Tuscany ||8,700|
|44 || Cyprus ||8,700|
|45 ||British Virgin Islands ||8,600|
|46 ||Telluride, Colorado || 8,200|
|47 ||Auckland ||7,900|
|48 ||Kiev ||7,900|
|49 ||Provence || 7,800|
|50 ||Revelstoke, Calgary ||7,400|
|51 ||Bangkok || 6,500|
|52 ||Western Algarve || 6,500|
|53 ||Miami || 6,300|
|54 ||Cape Town ||6,000|
|55 || Brussels || 5,800|
|56 || Barcelona ||5,300|
|57 ||Kuala Lumpur ||5,000|
|58 ||Umbria || 4,400|
|59 ||Christchurch ||3,400|
|60 ||Jakarta ||2,900|
|61 ||Bali ||2,600|
|62 ||Kenyan Coast || 2,100|
|63 ||Nairobi ||1,700|
See Databank for prices in other
* (houses) ** (apartments)