How are Family Offices responding to the pandemic?
July 30, 2020
Recently, our London Private Office and the Residential and Capital Markets Research teams in the UK looked into the reactions of ultra-high-net-worth-individuals (UHNWI) and how they were handling the pandemic. I thought this would be very interesting to Australians.
For the first time since the Spanish Flu the world is experiencing this virus and its impact together, so are many of the learnings and concerns common? The discussion is now on the Knight Frank Intelligence Talks podcast and involves Flora Harley, Residential Research Associate, Anthony Duggan, Head of Global Capital Markets Research, Sarah-May Brown, Private Office Partner and Rory Penn, Co-Chair of Knight Frank Private Office. I’ve summarised many of the learnings and added some Australian commentary.
The global economy is experiencing turbulent and difficult times. We are now seeing a second wave of outbreak in COVID-19 around the globe. Global GDP is expected to drop by 5%. International travel has been dramatically impacted as borders close and governments try and juggle the responsibility of testing their own sick populations, delivering health care and managing the economy during what looks to be a global recession.
With most countries encouraging an isolation strategy to help reduce the virus spread, the retail and hospitality sectors have been damaged – tough conditions abound but there are occasional good spending signs occurring (often linked to government stimulus initiatives) and initiatives in online retailing.
In the UK, savings rate has increased and looks to continue as there is less security with employment. In Australia, the government has permitted early access to superannuation, which is capped at $10,000 pa. Most superannuants have accessed the maximum amount and, in many cases, used it to repay debt. This is a quick health sense check to investing right now.
What is happening in the world of the UHNWI, those with US$30m and more and those invested in Family Offices?
UHNWI numbers were 500,000 in 2019. There has been an annual growth of 6% occurred in the past year. The love affair with property continues – 33% of all wealth with UHNWI is in property.
UHNWI are exposed to equities being 23% of their portfolio and 3% in gold. Wealth continues to be created by the wealthy, although there is evidence that 2020 will see many investment portfolios impacted adversely by a loss of confidence in certain markets.
The age of a UHNWI is getting younger – now under 50, comprising both generational, inherited and business success (particularly technology and finance). Coincidently, but not unexpectedly it is also the average age of buyer market in London for super prime.
There is a strong focus on capital preservation particularly as it has proved harder to assess value and even harder to find opportunity. There are now many more risks, some of which are extreme. Wealth protection is occurring as investors move their investment strategy to more credible markets. Preferred classes of property are still office being number one, healthcare, and hotels and leisure. There has been a conscious move away from residential and into student accommodation. This was a trend in 2019 but all of these categories are now adversely impacted by the pandemic.
Private money is now following fund investment principles, it is institutionalising. Family Offices are looking to institutionalise by moving to efficient structures and processes as well as becoming more professional. We are now seeing lots of growth in Family Offices, up 38% on last year. There is a shift in style to institutional investing, often through diversification and a balanced portfolio, as investors become more risk adverse.
We expect 79% of private wealth will increase their weighting in property. Why? Because yields are about 8%, historically comprising a stable income and a visible yield. Also attractive are the long-term yield, capital gains, ability to manage the property, allows for diversification and an opportunity to be an entrepreneur. This is appealing particularly with the cost of borrowing being at all time low interest rate levels.
We are seeing a shift in second home locations due to limits on travel in the next one to two years. Philanthropy is getting bigger and so too passion plays. We are hearing more about environmental, social and governance (ESG) as well as forestry, particularly where retaining natural forests has taxation benefits.
How would you invest $100m? In the long term, into super cities as these are growth cities. Building a portfolio in order to diversify the risk, focus on a defensive strategy as this is late stage in the cycle.
Are we heading for the largest recession in our lives? It is interesting that the weight of capital is continuing to grow and that short and long term interest rates are so low. Whilst no one knows the answer to the road ahead there will continue to be a strong focus on education, innovation and of course where in the world best services these needs.