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the wealth report
              2009

ProPerty: Tracking prices in The world’s prime residenTial locaTions
assets: how The markeTs for classic cars, wine and arT are faring
IntervIew: ciTy designer alejandro guTierrez shares his visionary ideas
oPInIon: money isn’T everyThing, says philosopher alain de BoTTon




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                        Anywhere. Now you can search and compare beautiful residential
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Market coverage: UK  Europe  Caribbean  Asia  Australia  Africa
Residential: Agency Sales & Lettings  Equestrian & Rural  Financial Services
             Residential Development  Valuations & Consultancy
Commercial: Agency & Capital Markets  Trading Properties  Professional Services  Financial Services
PHOTOGRAPH: Richard Powers (richardpowers.co.uk)




                                                   wealth n
                                                   1. a large amount                                                           Contents                                                                     Attitudes                                                                    Growing concerns                                           32
                                                                                                                                                                                                            Attitudes to wealth                                         12               How global farmland
                                                   of money or                                                                 Welcome letter and
                                                                                                                               contributors                                                   5             Where HNWIs invest,                                                          values are faring during
                                                   possessions.                                                                                                                                             how and why                                                                  the economic downturn

                                                   2. Econ. all goods                                                          Monitor
                                                                                                                                                                                                            Causes for concern
                                                                                                                                                                                                            How the credit crisis is
                                                                                                                                                                                                                                        16                                               Trading places
                                                                                                                                                                                                                                                                                         Asian financial centres
                                                                                                                                                                                                                                                                                                                                                    34

                                                   and services with                                                           World overview              6                                                affecting the trend towards                                                  will overtake London,
                                                   monetary value.                                                             Sebastian Dovey, of Scorpio                                                  philanthropy                                                                 according to Joergen
                                                                                                                                                                                                                                                                                         Oerstroem Moeller
                                                                                                                               Partnership, assesses the
                                                   3. an abundance                                                             impact of the economic
                                                                                                                                                                                                            Money matters?
                                                                                                                                                                                                            There’s more to wealth than
                                                                                                                                                                                                                                       20

                                                   or great profusion:                                                         downturn on the super rich
                                                                                                                                                                                                            a healthy bank balance, says                                                 Trends
                                                    a wealth of gifts.                                                         The future foretold
                                                                                                                               A panel of experts dissects
                                                                                                                                                                                              8             philosopher Alain de Botton
                                                                                                                                                                                                                                                                                         The art of investment                                      36
                                                                                                                                                                                                                                                                                         Unravelling the allure of
                                                   4. Arch. wellbeing                                                          key economic issues
                                                                                                                                                                                                                                                                                         art, cars and wine for the
                                                                                                                                                                                                            Property
                                                   or prosperity.                                                              Rouble trouble                                               10
                                                                                                                                                                                                            New horizons                                                23
                                                                                                                                                                                                                                                                                         modern investor
                                                                                                                               Why Russia’s economy
                                                                                                                                                                                                            Ten emerging global                                                          What’s next?                 40
                                                                                                                               is feeling the chill,
                                                                                                                                                                                                            opportunities                                                                The latest fashions in
                                                                                                                               by Edward Lucas
                                                                                                                                                                                                                                                                                         property, interiors and
                                                                                                                                                                                                            Prime property                                             26                luxury travel, as identified
                                                                                                                                                                                                            The annual PIRI index                                                        by Katherine Vaughan
                                                                                                                                                                                                            World Cities Survey          29                                              Design for the times        44
                                                                                                                                                                                                            The new Knight Frank index                                                   Arup’s Alejandro
                                                                                                                                                                                                            ranks the world’s top cities                                                 Gutierrez shares his vision
                                                                                                                                                                                                                                                                                         for sustainable cities
                                                                                                                                                                                                                                                                                         Contacts                                                   47

                                                   Notes and definitions: hnWi is an acronym for 'high net worth individual’, a person whose investible assets, excluding their principal residence, total between $1m and $10m. an UhnWi (ultra high net worth individual) is a person whose investible assets, excluding primary residence, are
                                                   valued at between $10m and $100m plus. the term ‘prime property’ equates to the most desirable, and normally most expensive, property in a defined location. commonly, but not exclusively, prime property markets are areas where demand has a significant international bias. Exchange
                                                   rates: unless otherwise stated these were calculated using the rate on 2 January 2009. the Wealth report 2009 attitudes Survey: the participants of the survey comprised 60 citi Private Bank wealth managers around the world, representing around 2,000 hnWis. Survey conducted between
                                                   1 December 2008 and 31 January 2009. Written and edited by andrew Shirley and Liam Bailey, knight frank LLP. For research and press enquiries: Liam Bailey, knight frank LLP, 55 Baker Street, London W1U 8an; +44 (0)20 7629 8171
                                                   Cover image: richard Powers Colour repro: colour Systems Printing: the Westdale Press Ltd. the Wealth report 2009 is published by redwood (7 St martin's Place, London Wc2n 4ha; +44 (0)20 7747 0700) on behalf of knight frank LLP in association with citi Private Bank.
                                                   For Knight Frank: Head of Residential Research Liam Bailey Head of Rural Research andrew Shirley Marketing and Communications marisa Ling. For Citi Private Bank: Head of Business Development David Poole Marketing and Communications Susan tether, alison taylor.
                                                   For Redwood: Editor alison tyler Art Director Jo raynsford Deputy Editor marcus trower. With thanks to chris hodgson and chris hubbard. Account Manager kirsty Ware Creative Director Paul kurzeja Editorial Director Sara cremer.
                                                   © knight frank LLP 2009. the views expressed in this report are collated by the authors from opinions expressed by individuals working within or alongside the property and financial industries. although high standards have been used in the preparation of the information, analysis, views
                                                   and projections presented in this report, no legal responsibility can be accepted by knight frank residential research or knight frank LLP for any loss or damage resultant from the contents of this document. this material does not necessarily represent the view of knight frank LLP in
                                                   relation to particular properties or projects. reproduction of this report in whole or in part is allowed with proper reference to knight frank residential research. knight frank LLP is a limited liability partnership registered in England with registered number oc305934. our registered office
                                                   is 55 Baker Street, London W1U 8an, where you may look at a list of members’ names.


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©2009 Citigroup. All rights reserved                                                                                                                           Citibank. N.A., Member FDIC
Contributors
              Andrew
                                                                      Welcome             to the 2009 edition of
                                                 Edward               The Wealth Report, the third such collaboration
              Shirley                            Lucas                between Knight Frank and Citi Private Bank.
                the head                          Lucas has
                of rural
                                                                        Over the past 12 months the economic outlook has
                                                  been covering
Property research at knight        russia and Eastern Europe          become even more uncertain. Most of the developed
frank, Shirley edited this         since 1986 for the likes of the    world is now in recession, and even the emerging
edition of the Wealth report.      independent, BBc and most
he formerly covered Uk and         recently, the Economist, for       economies have been forced to pause for breath. Every
global property markets as         which he was the moscow            commentator accepts 2009 will be tough. Our Attitudes
Business and Property Editor       Bureau chief from 1998 to
at the Uk’s leading farming        2002 and is now central and
                                                                      Survey (page 12) indicates clearly that HNWIs will look
magazine. he has an                Eastern Europe correspondent.      to protect their wealth from the ravages of the
international background,          his book, the new cold War:
having worked on agricultural      how the kremlin menaces
                                                                      downturn with an emphasis firmly on security and
projects in asia and africa.       both russia and the West, was      transparency rather than risk.
Farmland focus               32    published in february last year.     The tangible nature of property means it is well
                                   Future wealth trends          10
                                                                      placed to benefit from this shift in emphasis, and there
                                                                      are signs that some mature prime property markets,
              Katherine                          Liam                 such as London and New York, have readjusted to price
              Vaughan                            Bailey               levels that offer good value for purchasers. For some
                after reading                     the head of         emerging markets, the rollercoaster ride looks set to
                English at                        knight frank’s
Brasenose college, oxford,
                                                                      continue. A full analysis of prime global markets is
                                   market-leading residential
Vaughan spent 10 years             research team, Bailey is a         included on page 26, and we recommend 10 locations
working at the Spectator,
where she was Strategic
                                   recognised authority on            and sectors that offer potential for growth on page 23.
                                   residential and property trends,
Director, and later at             and is widely quoted in the          As property is just one aspect of wealth, we have
international art magazine,        media. he works with clients       expanded the scope of The Wealth Report by including
apollo, as associate Publisher.    in the Uk, US, australia and
She is now a freelance writer      Europe, advising on their
                                                                      an investigation into the performance of alternative
specialising in luxury brands.     market strategies.                 assets, from art and cars to wine (page 36), and an
Luxury trends                 40   Prime property               26    assessment of the state of the philanthropy sector
                                                                      (page 16). Influential thinkers, such as Alain de Botton
                                                                      (page 20), also share their views on how the world will
              Jon                                Alain de             adjust to life post credit crunch.
              Neale                              Botton                 We hope you enjoy reading the report.
               knight frank's                      Born in Zurich,
               head of                             Switzerland
Development research is            in 1969, de Botton now lives in
a former journalist with five      London. a writer of essayistic
years’ experience of writing       books that have been described
about property and housing.        as giving a philosophy of
a former residential Editor        everyday life, de Botton also
of Estates gazette, he has         helps to run the School of Life
particular expertise in            in London, which is dedicated to
residential development,           a new vision of education. his     Patrick Ramsay              Peter Charrington
regeneration, planning and         next book, the Pleasures and       HEAD OF RESIDENTIAL         HEAD OF CITI PRIVATE BANK UK
government policy.                 Sorrows of Work, will be           Knight Frank                Citi Private Bank
Attitudes to philanthropy 16       published later this year.
                                   The meaning of wealth 20




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monitor          Overview                                                                                                                                                                                                                                                                 Overview monitor




status report

                                                                                                                                                                                                                                                                                             GLoBAL WEALtH



crunch
                                                                                                                                                                                                                                                                                               DiStriBUtion
                                                                                                                                                                                                                                                                                             (% of total number of
                                                                                                                                                                                                                                                                                           HnWis by region, 2008*)




time                                                                                                                                                                                                                                                                                             25%
                                                                                                                                                                                                                                                                                                 asia pacific
What impact has the global economic
downturn had on the fortunes of the
world’s super rich? Sebastian Dovey, of
                                                                                                                                                                                                                                                                                                  3%
                                                                                                                                                                                                                                                                                                middle east
Scorpio Partnership, sets out his view                                                                                                                                                                                                                                                             & africa

i l l u s t r at i O n b y n i C K r E D D y H O F F
                                                                                                                                                                                                                                                                                                28%     europe


               ealthy investors across the world have
               been as shocked by the severity of the
                                                                                                                                                                                                                                                                                                37%     north
               current financial crisis as the average                                                                                                                                                                                                                                                 america
               investor. To a degree, many super
wealthy have fared slightly better, as their
professional advisers will have been able to
forecast the storm and they would have moved
                                                                                                                                                                                                                                                                                                       7%
                                                                                                                                                                                                                                                                                            latin america
                                                                                                                                                                                                                                                                                             & caribbean
into a more defensive asset allocation as much
as 12 months ago. However, the big question on
everyone’s mind is how long the current economic
conditions will last – and here even the super
wealthy do not have the answer.
   Inevitably, the next question is: when will
be the right time to get back into the market in
terms of investing? At the end of 2008, I was with
a family in Singapore who felt that the risk of
being slightly early to the market was going to           money are undergoing complete revision due to the                                                          intense review. Investors now look at financial          slowdown in property investment interest
be worth taking in the first quarter of 2009. They        turmoil. My best guess is that the mature economies                                                        institutions in a totally different light. There is      en masse, there are some specialist super rich
also freely acknowledged that they were basing            that are supported heavily by government                “Both buyers                                       a loss of confidence that the institutions are as        investors who are now beginning to deploy capital
this assessment on a hunch rather than any                intervention and a strong currency will recover more     and sellers have                                  mighty as they claim.                                    in new property ventures.
mathematical certainties.                                 quickly. In particular, we would look to European        to re-engage                                         Indeed, in my view, we have shifted into a new           We can expect some big changes in the year
   Global wealth distribution remained broadly            countries. But there are also certain emerging
                                                                                                                   with the concept                                  world order for wealth management where clients          ahead: clients will want to take much greater control
static last year following a period of strong growth
in emerging markets. As the credit crunch and
                                                          markets, such as South Africa, which have not been
                                                          as substantively affected and may show green shoots
                                                                                                                   of responsible                                    will actively seek out independent advice and
                                                                                                                                                                     recognise this as a value solution. Strange though
                                                                                                                                                                                                                              of their wealth matters. This is perfectly reasonable.
                                                                                                                                                                                                                              In many ways, I am very excited about this market
recession unfold, the distribution will remain the        of recovery earlier.                                     and realistic                                     this may sound, I think this is going to be a good       condition. For over a decade I have been calling
same globally, although in absolute terms the                 In terms of wealth management, the world’s           investing”                                        thing in the long run. Both buyers and sellers have      for change in the industry, with greater respect
number of HNWIs will inevitably fall, as most             super rich, particularly in Europe, are beginning                                                          to re-engage with the concept of responsible and         toward the process of offering advice and building
individuals have experienced, on average, a fall          to seek investment opportunities, and while they                                                           realistic investing.                                     a client-centric focus.
in total wealth of between 20% and 40%.                   acknowledge they might not be getting it exactly                                                              At the moment, we are hearing of a greater               Behind this call is a driving passion to see the
   Investors will have to begin to accept risk again if   right in terms of market timing, they know an                                                              appeal among clients toward direct investment.           customer – of whatever level of fortune – being
they wish to recover some of their wealth, but the        opportunity when they see one. One investor                                                                The asset classes could be private equity, real estate   better served in financial services. While I did not
crucial matter remains identifying the right time to      suggested to me in Geneva recently that “the best                                                          and even venture capital. Critically, the clients want   realise it would require a cataclysm to bring about
get back into the market and, more specifically,          thing to do when you fall off your ‘investment bike’                                                       to know what it is that they are buying, the             the change and for the industry to hear my calls, it
identifying the right asset classes in which to           is to get right back on it”. Private equity and real                                                       provenance of the opportunity and also have a            is here now, so let us just get on with it. It is time for
participate. Here, we expect many of the super rich       estate are asset classes of particular interest.                                                           greater influence in the outcome. During the last        change. And it is time for a new agenda.
                                                                                                                                                                                                                                                                         •
                                                                                                                                      *source: scorpio Partnership




to lead the way, as they are often at the frontier of         But the credit crunch has fundamentally                                                                12 months they have learnt that they do not like the
wealth creation.                                          changed wealth management. This is a critical                                                              sense of helplessness that comes with being swept        Sebastian Dovey is Managing Partner and Head
   Predicting where wealth creation will recover          issue. We are now in a new era of wealth re-creation,                                                      along in the market crises. This is being                of Consulting at Scorpio Partnership.
first is almost impossible, as the rules of making        and the role of the financial institutions is under                                                        demonstrated in the property market. Despite the         www.scorpiopartnership.com

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criSiS
talkS
In January, Knight Frank hosted a panel
of leading experts from the worlds of investment,
property and wealth management in order to                                              How bad is the current recession compared with          by governments, intensifies. However, the ability of                        GH It is likely that there will be protectionist
discuss the critical issues affecting the global                                        others you have experienced?                            regulation to prevent another bear market is                                movements in particular industries, especially
economy. Here are the highlights                                                        Nick BurNell The most striking characteristic is its    questionable. Indeed, intervention of states in          “This is the       those that take state funding, as shareholders with
                                                                                        breadth, both internationally and across different      markets has not led to a substantial resumption of        worst recession   alternative agendas to the norm join the corporate
Portr aits By aNNaBel moeller                                                           sectors of the economy. Most economic downturns         lending so far, although it can be argued it              in my working     arena. But trade will continue between states and
                                                                                        in the recent past have been more concentrated          prevented the collapse of the system entirely.            lifetime. It      companies with regional or global supply chains.
the panel                                                                               geographically and on particular industries. The
                                                                                        widespread nature of the current one results from       When will property prices stop falling and when
                                                                                                                                                                                                          connotes          One minute we are worrying about inflation, then
                                                                                        its root cause in the credit markets, which have        will they start to pick up again?                         profound          deflation, then inflation again. What is happening,
                                                                                        turned off the tap after a sustained period of          ro I think prices will continue to fall for               change for the    and which should we fear the most?
                                                                                        excessive liquidity. The effect of this has been a      investment property in secondary and tertiary             Anglo-Saxon       PW Deflation is today’s principal concern. Sharply
                                                                                        radical correction in the pricing of almost every       locations throughout 2009, but I think core property      business model”   deteriorating global growth, prompted by a large
                                                                                        asset class, as the disconnect between inflated         will reach the bottom this year. People will start                          synchronous collapse in global trade, is reigniting
                                                                                        pricing and fundamentals has been cruelly exposed.      buying this type of property because a current yield                        financial distress. Declining wealth, high levels of
                                                                                                                                                of 7% is much better than earning less than 1% in                           uncertainty and financial disruptions have led to
Philip Watson                 Roger Orf                     Nick Burnell                roGer orF This is the worst recession in my working     your bank account.                                                          sharp declines in demand around the world.
head of investment            president and ceo of          head of rutley capital      lifetime. It connotes profound change for the                                                                                          Lower commodity prices and rapidly growing
analysis and advice group,    citi property investors       partners, the real          Anglo-Saxon business model. The model is based          DaN tHomas The UK housing market is likely to                               output gaps have led to rapidly declining levels of
citi private bank emea                                      estate private equity and
                                                            investment management       on leverage and consumption, and the model is           continue to come under pressure throughout 2009                             inflation in most countries. It is likely that attention
                                                            business of the             broken. It will take three to five years to recover     but will hopefully stabilise in 2010 and start to see                       will eventually turn towards central banks and
                                                            knight frank group          from this downturn.                                     a relatively sound recovery in the years after. Never                       authorities to ensure reflationary policy is
                                                                                                                                                bet against further shocks to the system: the                               controlled and does not spiral rapidly into heavily
                                                                                        Should banks and other financial institutions brace     banking bailout has had no discernible effect on                            inflationary policy.
                                                                                        themselves for increased regulation in light of the     the supply of mortgages or lending criteria, and
                                                                                        failings exposed by the credit crunch, and would        that showed no sign of changing in the first quarter                        How would you rate government attempts to unlock
                                                                                        that help prevent a similar scenario in the future?     of this year. Buying into an economic recession                             the credit crunch, and will they work?
                                                                                        PHiliP WatsoN Without doubt we will see change – the    seems ill-advised, and all the indicators suggest this                      NB I would not rate them highly. The truth is the
Dan Thomas                    Graham Harvey                                             big question is what type. There is no question that    year will be tough, with climbing unemployment,                             taxpayer does not have sufficient financial resources
property correspondent for    Senior associate at Scorpio                               momentum towards the establishment of tighter           economic contraction and issues around inflation.                           to rebuild the balance sheets of the major banks,
the financial times, with a   partnership, a business
                                                                                        regulation is underway. Disparate regulation in the                                                                                 and this has to be accepted by government and fresh
beat that includes both Uk    strategy firm dedicated to
and global markets            the global wealth industry                                past, such as the imposition of leverage ratios, the    People are worried that the recession could usher in                        policy developed accordingly. An examination of
                                                                                        risk weighting of assets and – even more                a new era of global protectionism. Do you think that                        most banks’ balance sheets reveals a large liability
                                                                                        fundamentally – the meaning of capital, has led to      will happen, and what would be the consequences?                            component in the shape of bonds. They should be
                                                                                        some confusion. This has led to differing scenarios     NB There is certainly a risk of this type of knee-jerk                      obliged to convert these to equity in a manner akin
                                                                                        emerging across geographies. Remedies, therefore,       reaction. I happen to think, however, that the credit                       to the recapitalisations by creditors seen in most
                                                                                        also differ. A transparent, globally coordinated and    crisis will only be solved by concerted international                       other industries. The government should participate
                                                                                        harmonised approach with adequate resourcing            action that will eventually occur on a properly                             alongside to a restricted extent, perhaps only at a
                                                                                        would better support today’s global markets. Bank       coordinated basis. This approach will be                                    level necessary to protect depositors.
                                                                                        nationalisations, whether partial or complete, may      fundamentally incompatible with the adoption by
                                                                                        serve to speed the process, too, though it is           individual countries of strongly protectionist                              PW This is a difficult question to assess. There was
                                                                                        conceivable that immediate concerns, such as            policies. Conversely, therefore, were a mood of                             no dress rehearsal for the crunch. Furthermore,
                                                                                        easing credit conditions, may in the short term lead    strong protectionism to take root, then I think this                        governments responded in different ways and over
                                                                                        to looser bank capital constraints.                     would hamper efforts to restore the flow of                                 differing lengths of time. In my opinion, the key
                                                                                                                                                international credit and greatly prolong the                                issue here is how governments interact with their
                                                                                        GraHam Harvey There will be regulatory change, as       recession. I think we will see a little protectionism                       global counterparts to manage this international
                                                                                        public and shareholder pressure on financial            going on for domestic political reasons, but not at a                       economic reality, while also managing their
                                                                                        institutions, especially those partly or wholly owned   level that will be critically dangerous.                                    electorates’ local fears and concerns.
                                                                                                                                                                                                                                                                     •
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                                                                ussia’s economic performance over the                                                                                                                                                                                                                       Equities have plunged. Safe government debt yields
                                                                                                                                                                                                                                                                                                                                                                                                                   the public attitude to
                                                                past eight years has been astounding.                                                                                                                                                                                                                       almost nothing. Risky commercial debt is worth                                         banks during the crunch
                                                                Between Vladimir Putin becoming prime                                                                                                                                                                                                                       next to nothing. Worst of all, our sensible, wealthy    Russia in figures...
                                                      minister in 1999 and stepping down as president
                                                      last year, GDP rose more than six times in nominal
                                                                                                                                                                                                                                                                                                                            Russian may be facing demands from friends and
                                                                                                                                                                                                                                                                                                                            associates to repatriate some money to repay
                                                                                                                                                                                                                                                                                                                                                                                    $386bn                         A survey by the All-Russian Public Opinion Research
                                                                                                                                                                                                                                                                                                                                                                                                                   Centre (VTsIOM), ‘People and Banks Amid the
                                                                                                                                                                                                                                                                                                                                                                                    The nation’s foreign           Finanical Crisis: What Should Depositors Do?’,
                                                      terms. Poverty halved – only a sixth of Russians live                                                                                                                                                                                                                 favours and help them out. For those scrambling         currency reserves on
                                                                                                                                                                                                                                                                                                                                                                                                                   conducted in October 2008*
                                                      below the breadline, compared with one-third when                                                                                                                                                                                                                     for cash, one option might be to sell a prized          4 February, down by more
                                                      he took office. Once a basket case, Russia became                                                                                                                                                                                                                     property in London or New York. But the weakening       than a third from their peak
                                                                                                                                                                                                                                                                                                                                                                                    of $600bn in August 2008.                                               PeoPle who have
                                                      one of the largest economies in the world, paying                                                                                                                                                                                                                     residential property market means that these flats                                                    % 40.6%
                                                                                                                                                                                                                                                                                                                                                                                                                              59.4
                                                                                                                                                                                                                                                                                                                                                                                    40%
                                                                                                                                                                                                                                                                                                                                                                                                                                                            bank dePosits
                                                      off its debts and building up a $600 billion foreign                                                                                                                                                                                                                  and houses, bought at the top of the market, may be                                                                             (% of the total
                                                      currency reserve.                                                                                                                                                                                                                                                     worth considerably less.                                                                                                        number of
                                                                                                                                                                                                                                                                                                                                                                                    The drop in value of the                                                respondents)
                                                          Yet look a bit more closely and the results are less                                                                                                                                                                                                                  The most likely solution is an uncomfortable one:   rouble in the six months to
                                                      impressive. Russia failed to diversify its economy.                                                                                                                                                                                                                   thrift and patience. The bad thing about being rich     4 February. The currency
                                                                                                                                                                                                                                                                                                                                                                                                                                                            Are not AFrAid oF
                                                                                                                                                                                                                                                                                                                                                                                    hit a historic low against
                                                      The number of small and medium-sized enterprises                                                                                                                                                                                                                      is that you have expensive habits. The good thing is    the dollar at a few kopeks
                                                                                                                                                                                                                                                                                                                                                                                                                                                            losing their money




                                                                                                                 *the Vtsiom conducted the proactive nationwide survey among 1,600 respondents in 140 settlements in 42 regions, territories and republics of russia in october 2008. the margin of error is within 3.4%.
                                                      shrank. Reform in public service faltered. Plans for                                                                                                                                                                                                                  that you can always cut back on them in a downturn.     short of 41 roubles.
                                                      new roads, schools, hospitals and power stations                                                                                                                                                                                                                          The bigger questions are about what the
                                                      were much-publicised but rarely completed.                                                                                                                                                                                                                            future holds. Firstly, will the current traumas and     8.7%                                                                    Are AFrAid oF
                                                                                                                                                                                                                                                                                                                                                                                                                                                            losing their money

                                                      Corruption rocketed. As Boris Nemtsov and                                                                                                                                                                                                                             economic pain in Russia herald a future in which        The fall in industrial
                                                                                                                                                                                                                                                                                                                                                                                    output in November 2008,
e xPert oPinion                                       Vladimir Milov have pointed out in their seminal                                                                                                                                                                                                                      wealth is held more widely and more durably?
                                                                                                                                                                                                                                                                                                                                                                                    compared with the previous
                                                      pamphlet, Putin: The Bottom Line, the results of the                                                                                                                                                                                                                  Economic downturns have one good feature: they          year, according to figures
                                                                                                                                                                                                                                                                                                                                                                                                                   the safest way to save Money




WiLL ThE
                                                      past eight years are actually rather feeble. The same                                                                                                                                                                                                                 highlight the faults of badly managed businesses.       published in December.         (% of the total number of respondents)
                                                      point is made, from a different quarter, by Igor
                                                      Yurgens, who runs a think tank close to the Russian
                                                                                                                                                                                                                                                                                                                            That can give the well-managed competitor a
                                                                                                                                                                                                                                                                                                                            chance to move in. For now, the story in Russia is      $42.8                          property                                                      51%




BEar
                                                                                                                                                                                                                                                                                                                                                                                    The average price for Urals
                                                      president, Dmitri Medvedev.                                                                                                                                                                                                                                           of the politically motivated bailout. But over the      crude oil on global markets    gold And Jewellery                                            19%
                                                          So when the financial crisis hit Russia, the                                                                                                                                                                                                                      economy as a whole, the downturn will see more bad      in January this year. The      sberbAnk (russiA’s lArgest bAnk)                              17%
                                                      country was more fragile than it should have been,                                                                                                                                                                                                                    businesses go bust than good ones – and that is an      budget forecast an oil price



BuckLE?
                                                                                                                                                                                                                                                                                                                            opportunity for the entrepreneurial class.              of $70.                        roubles in cAsh                                               13%
                                                      given the recent bonanza. The stock market has
                                                      plunged by nearly three-quarters. The rouble –
                                                      once a symbol of Russia’s recovery from the 1998
                                                                                                                                                                                                                                                                                                                                Secondly, will the business class in Russia
                                                                                                                                                                                                                                                                                                                            develop a political voice? One of the startling
                                                                                                                                                                                                                                                                                                                                                                                    13.8%                          shAres oF compAnies                                           8%

                                                                                                                                                                                                                                                                                                                                                                                    The rate of inflation last     Foreign cAsh currency                                         7%
                                                      economic crisis – has been steadily devaluing.                                                                                                                                                                                                                        features of opinion poll surveys over the past
russia has seen huge levels of wealth creation in                                                                                                                                                                                                                                                                                                                                   November. One of the
                                                      Investors who hold Russian commercial debt                                                                                                                                                                                                                            eight years has been the clash between Russians’        biggest macro-economic
recent years. edward lucas, a leading commentator                                                                                                                                                                                                                                                                                                                                   problems over the previous
                                                      are twitchy. Inflation is high and unemployment                                                                                                                                                                                                                       appreciation of higher living standards and                                            complaints of business – about tax rules, about bad
on the country, evaluates what the global recession   is rising. The rickety financial system has not                                                                                                                                                                                                                       political stability, and their generally gloomy
                                                                                                                                                                                                                                                                                                                                                                                    two years, inflation remains
                                                                                                                                                                                                                                                                                                                                                                                                                   roads and about silly regulations – are the
                                                                                                                                                                                                                                                                                                                                                                                    stubbornly high.
will now mean for its economy and super rich          collapsed, but it is in poor health. For many who                                                                                                                                                                                                                     feelings about the nitty-gritty performance of                                         foundation of political pluralism.
                                                      have done well out of the past eight years, these are                                                                                                                                                                                                                 the government. Is corruption getting better or                                          Thirdly, if the business people of Russia do
i l l u s t r At i o n b y l u k e w i l s o n
                                                      worrying times.                                                                                                                                                                                                                                                       worse? Worse, say the polls – and president Dmitri                                     demand a better deal, will the Kremlin actually
                                                          A sensible, wealthy Russian would typically                                                                                                                                                                                                                       Medvedev agrees. Are elected representatives                                           pay attention to them? For now the arguments
                                                      diversify his assets and income streams: some                                                                                                                                                                                                                         following their own interests or those of their                                        seem finely balanced, with people around
                                                      would be inside Russia – perhaps in the company                                                                                                                                                                                                                       voters? Their own. Are public services getting                                         Medvedev, such as the economist Igor Yurgens,
                                                      or job where he first made his fortune. Then there                                                                                                                                                                                                                    better or worse? Worse. And so on.                                                     saying that the time has come for more political
                                                      might be some property in London, plus a mix of                                                                                                                                                                                                                           For anyone doing business in Russia, the costs                                     and economic openness, and some people around
                                                      blue-chip equities and government securities, with                                                                                                                                                                                                                    of the overloaded infrastructure and predatory                                         Putin saying the opposite. On the outcome of that
                                                      a few holdings in hedge funds and more exotic                                                                                                                                                                                                                         officialdom are burdensome and infuriating. Yet,                                       hangs the future of Russia’s new middle class – and
                                                      investments, perhaps with leveraged bets at
                                                      brokers in Moscow or London.
                                                                                                                                                                                                                                                                                                                            so far the business world has preferred to keep its
                                                                                                                                                                                                                                                                                                                            head down and enjoy the profits rather than
                                                                                                                                                                                                                                                                                                                                                                                                                   much else besides.
                                                                                                                                                                                                                                                                                                                                                                                                                                         •
                                                          For the truly unlucky, all those have gone sour                                                                                                                                                                                                                   complain about the costs. With the downturn,                                           Edward Lucas is the Central and Eastern Europe
                                                      at once. The brokers are demanding margin calls.                                                                                                                                                                                                                      there is just a chance that this will change. The                                      Correspondent for The Economist.

 10   c it iprivatebank.com                                                                                                                                                                                                                                                                                                                                                                                                                             k ni ght f r a nk .com    11
Attitudes      Attitudes to wealth                                                                                                                                                                              Attitudes to wealth Attitudes




                                                                                                                                                                                                                                                           pHotoGrApHy: richard powers
re Se arch

                                               t’s tempting to assume that wealth insulates        Survey DiStribution             enough to have increased their exposure to equities.      quickly. Many investors also acknowledge the



Changing
                                               HNWIs from the day-to-day worries associated                                           Bank accounts have been the biggest beneficiary        long-term nature of property investment: even
                                               with economic downturns. Surely, when you are                                       from the flight away from stock market volatility –       if values fall your asset is unlikely to disappear
                                                                                                          %
                                           worth millions or even billions, it doesn’t matter                                      almost 60% of those represented by our survey have        completely. Despite this, a significant number




                                                                                                                            33
                                                                                                     28
fortunes


                                                                                                                              %
                                           if stock markets fall a bit or your house is worth                                      substantially increased the amount they have on           of HNWIs have either increased or reduced their
                                           less than you paid for it. However, according to the                                    deposit. The perceived safety of the bond markets is      exposure, with a very small percentage increasing
                                           results from The Wealth Report’s Attitudes Survey,                                      reflected by the fact that 67.8% of respondents have      it substantially.




                                                                                                      7%
                                           which was completed by a global spread of Citi                 1           22%          increased their exposure to this kind of investment.          This ambivalence is probably a reflection of the
The results from The Wealth Report’s       Private Bank’s wealth managers acting for almost                                        But uncertainty about the ability of even national        diversity of the property market and the attitude of
HNWI Attitudes Survey provide a unique     2,000 of the world’s richest people, that is not the                                    governments to repay increasing levels of debt could      the wealthy towards it. While stock markets around
                                                                                                   europe & russia	
window on how the credit crunch is         case. The wealthy have the same preoccupations and      Americas	                       explain why 14.3% of people have decided to reduce        the world have all been heading one way only,
affecting the behaviour and attitudes of   concerns as everybody else. If anything, they keep an   China, se Asia & Australasia	   their exposure to bonds.                                  property markets have not reacted homogeneously.
                                           even closer eye on their investments and react more     middle east, indian                                                                       As our PIRI survey on page 26 confirms,
the wealthy towards their property and                                                             subcontinent & Africa	
investment portfolios. Knight Frank’s      quickly when markets start to change.                                                   property As An investment                                 performance has varied widely. In those areas where
Andrew Shirley analyses the numbers                                                                                                When looking at bricks and mortar as an investment        values dropped fastest and furthest, canny HNWI
                                           Asset Distribution                                                                      class, the picture becomes less clear. The majority       investors are sensing the bottom of the downturn is
                                           There has already been a substantial shift in asset                                     of HNWIs appear to be sitting on the fence at the         imminent and are slowly reinvesting.
                                           distribution among the rich, who appear to have                                         moment, with 57.1% making no change to their                  Experienced investors realise we are firmly into
                                           taken decisive action to mitigate risk and protect                                      property portfolios, although over 90% have seen          the bargain-hunting stage of the property cycle,
                                           their wealth (see bar chart on page 14). Although                                       their property portfolios decrease in value during        especially in the commercial and newbuild sectors.
                                           the creation of fortunes is often associated with                                       the credit crunch, with about a third of those hit by a   A number of survey respondents said their clients
                                           risk and daring decisions, safety first seems to be                                     substantial decrease (see the graphs on page 14).         were actively looking to take advantage of distressed
                                           the mantra in times of economic turbulence, with                                           The illiquid nature of property probably goes          sales to cheaply acquire stable assets with good
                                           both transparency and stability highly valued. Based                                    some way towards explaining this lack of action.          yields. Many fortunes have been property-based and
                                           on this survey, almost 90% of HNWIs have either                                         While an entire portfolio of stocks and shares can        a large proportion of the HNWI community has a
                                           decreased or substantially decreased their exposure                                     be sold with just a few taps on a keyboard, it is         passion for property ownership. According to our
                                           to equities, while virtually all have moved away from                                   more difficult – and sometimes almost impossible          survey, property accounts on average for 30% of their
                                           hedge funds. A small proportion, 7%, feels confident                                    – during an economic downturn to sell property            asset portfolios. But even this enthusiasm has

12   c it iprivatebank.com                                                                                                                                                                                                   k ni ght f r a nk .com   13
The Wealth Report 2009
The Wealth Report 2009
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The Wealth Report 2009
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The Wealth Report 2009

  • 1. the wealth report 2009 ProPerty: Tracking prices in The world’s prime residenTial locaTions assets: how The markeTs for classic cars, wine and arT are faring IntervIew: ciTy designer alejandro guTierrez shares his visionary ideas oPInIon: money isn’T everyThing, says philosopher alain de BoTTon Change your view ne w investment opportunities o n t h e h o r i zo n – t h e g l o b a l g u i d e
  • 2. Destination Anywhere. Now you can search and compare beautiful residential properties across the world. Our new comprehensive search facility uses a single interface, so you can browse our global property listings effortlessly. Whether your list of requirements is long or short, our website will help you find your ultimate property dream. Get connected to your perfect property. Market coverage: UK  Europe  Caribbean  Asia  Australia  Africa Residential: Agency Sales & Lettings  Equestrian & Rural  Financial Services Residential Development  Valuations & Consultancy Commercial: Agency & Capital Markets  Trading Properties  Professional Services  Financial Services
  • 3. PHOTOGRAPH: Richard Powers (richardpowers.co.uk) wealth n 1. a large amount Contents Attitudes Growing concerns 32 Attitudes to wealth 12 How global farmland of money or Welcome letter and contributors 5 Where HNWIs invest, values are faring during possessions. how and why the economic downturn 2. Econ. all goods Monitor Causes for concern How the credit crisis is 16 Trading places Asian financial centres 34 and services with World overview 6 affecting the trend towards will overtake London, monetary value. Sebastian Dovey, of Scorpio philanthropy according to Joergen Oerstroem Moeller Partnership, assesses the 3. an abundance impact of the economic Money matters? There’s more to wealth than 20 or great profusion: downturn on the super rich a healthy bank balance, says Trends a wealth of gifts. The future foretold A panel of experts dissects 8 philosopher Alain de Botton The art of investment 36 Unravelling the allure of 4. Arch. wellbeing key economic issues art, cars and wine for the Property or prosperity. Rouble trouble 10 New horizons 23 modern investor Why Russia’s economy Ten emerging global What’s next? 40 is feeling the chill, opportunities The latest fashions in by Edward Lucas property, interiors and Prime property 26 luxury travel, as identified The annual PIRI index by Katherine Vaughan World Cities Survey 29 Design for the times 44 The new Knight Frank index Arup’s Alejandro ranks the world’s top cities Gutierrez shares his vision for sustainable cities Contacts 47 Notes and definitions: hnWi is an acronym for 'high net worth individual’, a person whose investible assets, excluding their principal residence, total between $1m and $10m. an UhnWi (ultra high net worth individual) is a person whose investible assets, excluding primary residence, are valued at between $10m and $100m plus. the term ‘prime property’ equates to the most desirable, and normally most expensive, property in a defined location. commonly, but not exclusively, prime property markets are areas where demand has a significant international bias. Exchange rates: unless otherwise stated these were calculated using the rate on 2 January 2009. the Wealth report 2009 attitudes Survey: the participants of the survey comprised 60 citi Private Bank wealth managers around the world, representing around 2,000 hnWis. Survey conducted between 1 December 2008 and 31 January 2009. Written and edited by andrew Shirley and Liam Bailey, knight frank LLP. For research and press enquiries: Liam Bailey, knight frank LLP, 55 Baker Street, London W1U 8an; +44 (0)20 7629 8171 Cover image: richard Powers Colour repro: colour Systems Printing: the Westdale Press Ltd. the Wealth report 2009 is published by redwood (7 St martin's Place, London Wc2n 4ha; +44 (0)20 7747 0700) on behalf of knight frank LLP in association with citi Private Bank. For Knight Frank: Head of Residential Research Liam Bailey Head of Rural Research andrew Shirley Marketing and Communications marisa Ling. For Citi Private Bank: Head of Business Development David Poole Marketing and Communications Susan tether, alison taylor. For Redwood: Editor alison tyler Art Director Jo raynsford Deputy Editor marcus trower. With thanks to chris hodgson and chris hubbard. Account Manager kirsty Ware Creative Director Paul kurzeja Editorial Director Sara cremer. © knight frank LLP 2009. the views expressed in this report are collated by the authors from opinions expressed by individuals working within or alongside the property and financial industries. although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by knight frank residential research or knight frank LLP for any loss or damage resultant from the contents of this document. this material does not necessarily represent the view of knight frank LLP in relation to particular properties or projects. reproduction of this report in whole or in part is allowed with proper reference to knight frank residential research. knight frank LLP is a limited liability partnership registered in England with registered number oc305934. our registered office is 55 Baker Street, London W1U 8an, where you may look at a list of members’ names. kn i g ht f ra nk.com 3
  • 4. Providing a Clear Path in an Increasingly Complex World Preserving assets is always a priority. But even in uncertain times, good long-term opportunities exist for those who know where to look. At Citi Private Bank we work to identify these opportunities. Allow us to show you the way. As one of the world’s leading private banks, we have a history of expertise and intellectual leadership that few institutions can match. We understand that our clients seek to build upon the successes of their own hard work. We provide capital as well as investment opportunities. Call us to schedule a private meeting to discuss the comprehensive services and industry-leading insights that you can get only from a global private bank. For locations worldwide visit www.citiprivatebank.com. Call us for a dialogue in these and other cities: Europe, Middle East & Africa Latin America North America Asia Pacific Abu Dhabi (971) 2 678 2727 Brazil (55) 11 4009 3432 Chicago (1) 312 384 1450 Hong Kong (852) 2868 8688 Dubai (971) 4 604 4411 Mexico (52) 55 22 26 83 17 Los Angeles (1) 213 239 1927 Singapore (65) 6227 9188 Geneva (41) 58 750 5000 Miami (1) 305 347 1800 New York (1) 800 870 1073 London (44) 207 508 8000 New York (1) 212 559 9155 Washington D.C. (1) 800 870 1073 “Citi Private Bank” is a business of Citigroup Inc., which provides its clients access to a broad array of products and services available through bank and non-bank affiliates. Not all prod- ucts and services are provided by all affiliates or are available at all locations. In the United Kingdom, Citibank N.A., London branch and Citibank International plc, Canada Square, Canary Wharf, London E14 5LB, are authorized and regulated by the Financial Services Authority. The contact number for Citibank N.A. London branch and Citibank International plc in the United Kingdom is +44 (0)20 7508 8000. Citi, and Citi with the arc design are registered service marks of Citigroup or its affiliates. ©2009 Citigroup. All rights reserved Citibank. N.A., Member FDIC
  • 5. Contributors Andrew Welcome to the 2009 edition of Edward The Wealth Report, the third such collaboration Shirley Lucas between Knight Frank and Citi Private Bank. the head Lucas has of rural Over the past 12 months the economic outlook has been covering Property research at knight russia and Eastern Europe become even more uncertain. Most of the developed frank, Shirley edited this since 1986 for the likes of the world is now in recession, and even the emerging edition of the Wealth report. independent, BBc and most he formerly covered Uk and recently, the Economist, for economies have been forced to pause for breath. Every global property markets as which he was the moscow commentator accepts 2009 will be tough. Our Attitudes Business and Property Editor Bureau chief from 1998 to at the Uk’s leading farming 2002 and is now central and Survey (page 12) indicates clearly that HNWIs will look magazine. he has an Eastern Europe correspondent. to protect their wealth from the ravages of the international background, his book, the new cold War: having worked on agricultural how the kremlin menaces downturn with an emphasis firmly on security and projects in asia and africa. both russia and the West, was transparency rather than risk. Farmland focus 32 published in february last year. The tangible nature of property means it is well Future wealth trends 10 placed to benefit from this shift in emphasis, and there are signs that some mature prime property markets, Katherine Liam such as London and New York, have readjusted to price Vaughan Bailey levels that offer good value for purchasers. For some after reading the head of emerging markets, the rollercoaster ride looks set to English at knight frank’s Brasenose college, oxford, continue. A full analysis of prime global markets is market-leading residential Vaughan spent 10 years research team, Bailey is a included on page 26, and we recommend 10 locations working at the Spectator, where she was Strategic recognised authority on and sectors that offer potential for growth on page 23. residential and property trends, Director, and later at and is widely quoted in the As property is just one aspect of wealth, we have international art magazine, media. he works with clients expanded the scope of The Wealth Report by including apollo, as associate Publisher. in the Uk, US, australia and She is now a freelance writer Europe, advising on their an investigation into the performance of alternative specialising in luxury brands. market strategies. assets, from art and cars to wine (page 36), and an Luxury trends 40 Prime property 26 assessment of the state of the philanthropy sector (page 16). Influential thinkers, such as Alain de Botton (page 20), also share their views on how the world will Jon Alain de adjust to life post credit crunch. Neale Botton We hope you enjoy reading the report. knight frank's Born in Zurich, head of Switzerland Development research is in 1969, de Botton now lives in a former journalist with five London. a writer of essayistic years’ experience of writing books that have been described about property and housing. as giving a philosophy of a former residential Editor everyday life, de Botton also of Estates gazette, he has helps to run the School of Life particular expertise in in London, which is dedicated to residential development, a new vision of education. his Patrick Ramsay Peter Charrington regeneration, planning and next book, the Pleasures and HEAD OF RESIDENTIAL HEAD OF CITI PRIVATE BANK UK government policy. Sorrows of Work, will be Knight Frank Citi Private Bank Attitudes to philanthropy 16 published later this year. The meaning of wealth 20 kn i g ht f ra nk.com 5
  • 6. monitor Overview Overview monitor status report GLoBAL WEALtH crunch DiStriBUtion (% of total number of HnWis by region, 2008*) time 25% asia pacific What impact has the global economic downturn had on the fortunes of the world’s super rich? Sebastian Dovey, of 3% middle east Scorpio Partnership, sets out his view & africa i l l u s t r at i O n b y n i C K r E D D y H O F F 28% europe ealthy investors across the world have been as shocked by the severity of the 37% north current financial crisis as the average america investor. To a degree, many super wealthy have fared slightly better, as their professional advisers will have been able to forecast the storm and they would have moved 7% latin america & caribbean into a more defensive asset allocation as much as 12 months ago. However, the big question on everyone’s mind is how long the current economic conditions will last – and here even the super wealthy do not have the answer. Inevitably, the next question is: when will be the right time to get back into the market in terms of investing? At the end of 2008, I was with a family in Singapore who felt that the risk of being slightly early to the market was going to money are undergoing complete revision due to the intense review. Investors now look at financial slowdown in property investment interest be worth taking in the first quarter of 2009. They turmoil. My best guess is that the mature economies institutions in a totally different light. There is en masse, there are some specialist super rich also freely acknowledged that they were basing that are supported heavily by government “Both buyers a loss of confidence that the institutions are as investors who are now beginning to deploy capital this assessment on a hunch rather than any intervention and a strong currency will recover more and sellers have mighty as they claim. in new property ventures. mathematical certainties. quickly. In particular, we would look to European to re-engage Indeed, in my view, we have shifted into a new We can expect some big changes in the year Global wealth distribution remained broadly countries. But there are also certain emerging with the concept world order for wealth management where clients ahead: clients will want to take much greater control static last year following a period of strong growth in emerging markets. As the credit crunch and markets, such as South Africa, which have not been as substantively affected and may show green shoots of responsible will actively seek out independent advice and recognise this as a value solution. Strange though of their wealth matters. This is perfectly reasonable. In many ways, I am very excited about this market recession unfold, the distribution will remain the of recovery earlier. and realistic this may sound, I think this is going to be a good condition. For over a decade I have been calling same globally, although in absolute terms the In terms of wealth management, the world’s investing” thing in the long run. Both buyers and sellers have for change in the industry, with greater respect number of HNWIs will inevitably fall, as most super rich, particularly in Europe, are beginning to re-engage with the concept of responsible and toward the process of offering advice and building individuals have experienced, on average, a fall to seek investment opportunities, and while they realistic investing. a client-centric focus. in total wealth of between 20% and 40%. acknowledge they might not be getting it exactly At the moment, we are hearing of a greater Behind this call is a driving passion to see the Investors will have to begin to accept risk again if right in terms of market timing, they know an appeal among clients toward direct investment. customer – of whatever level of fortune – being they wish to recover some of their wealth, but the opportunity when they see one. One investor The asset classes could be private equity, real estate better served in financial services. While I did not crucial matter remains identifying the right time to suggested to me in Geneva recently that “the best and even venture capital. Critically, the clients want realise it would require a cataclysm to bring about get back into the market and, more specifically, thing to do when you fall off your ‘investment bike’ to know what it is that they are buying, the the change and for the industry to hear my calls, it identifying the right asset classes in which to is to get right back on it”. Private equity and real provenance of the opportunity and also have a is here now, so let us just get on with it. It is time for participate. Here, we expect many of the super rich estate are asset classes of particular interest. greater influence in the outcome. During the last change. And it is time for a new agenda. • *source: scorpio Partnership to lead the way, as they are often at the frontier of But the credit crunch has fundamentally 12 months they have learnt that they do not like the wealth creation. changed wealth management. This is a critical sense of helplessness that comes with being swept Sebastian Dovey is Managing Partner and Head Predicting where wealth creation will recover issue. We are now in a new era of wealth re-creation, along in the market crises. This is being of Consulting at Scorpio Partnership. first is almost impossible, as the rules of making and the role of the financial institutions is under demonstrated in the property market. Despite the www.scorpiopartnership.com 6 c it iprivatebank.com k ni ght f r a nk .com 7
  • 7. monitor Future wealth trends Future wealth trends monitor criSiS talkS In January, Knight Frank hosted a panel of leading experts from the worlds of investment, property and wealth management in order to How bad is the current recession compared with by governments, intensifies. However, the ability of GH It is likely that there will be protectionist discuss the critical issues affecting the global others you have experienced? regulation to prevent another bear market is movements in particular industries, especially economy. Here are the highlights Nick BurNell The most striking characteristic is its questionable. Indeed, intervention of states in “This is the those that take state funding, as shareholders with breadth, both internationally and across different markets has not led to a substantial resumption of worst recession alternative agendas to the norm join the corporate Portr aits By aNNaBel moeller sectors of the economy. Most economic downturns lending so far, although it can be argued it in my working arena. But trade will continue between states and in the recent past have been more concentrated prevented the collapse of the system entirely. lifetime. It companies with regional or global supply chains. the panel geographically and on particular industries. The widespread nature of the current one results from When will property prices stop falling and when connotes One minute we are worrying about inflation, then its root cause in the credit markets, which have will they start to pick up again? profound deflation, then inflation again. What is happening, turned off the tap after a sustained period of ro I think prices will continue to fall for change for the and which should we fear the most? excessive liquidity. The effect of this has been a investment property in secondary and tertiary Anglo-Saxon PW Deflation is today’s principal concern. Sharply radical correction in the pricing of almost every locations throughout 2009, but I think core property business model” deteriorating global growth, prompted by a large asset class, as the disconnect between inflated will reach the bottom this year. People will start synchronous collapse in global trade, is reigniting pricing and fundamentals has been cruelly exposed. buying this type of property because a current yield financial distress. Declining wealth, high levels of of 7% is much better than earning less than 1% in uncertainty and financial disruptions have led to Philip Watson Roger Orf Nick Burnell roGer orF This is the worst recession in my working your bank account. sharp declines in demand around the world. head of investment president and ceo of head of rutley capital lifetime. It connotes profound change for the Lower commodity prices and rapidly growing analysis and advice group, citi property investors partners, the real Anglo-Saxon business model. The model is based DaN tHomas The UK housing market is likely to output gaps have led to rapidly declining levels of citi private bank emea estate private equity and investment management on leverage and consumption, and the model is continue to come under pressure throughout 2009 inflation in most countries. It is likely that attention business of the broken. It will take three to five years to recover but will hopefully stabilise in 2010 and start to see will eventually turn towards central banks and knight frank group from this downturn. a relatively sound recovery in the years after. Never authorities to ensure reflationary policy is bet against further shocks to the system: the controlled and does not spiral rapidly into heavily Should banks and other financial institutions brace banking bailout has had no discernible effect on inflationary policy. themselves for increased regulation in light of the the supply of mortgages or lending criteria, and failings exposed by the credit crunch, and would that showed no sign of changing in the first quarter How would you rate government attempts to unlock that help prevent a similar scenario in the future? of this year. Buying into an economic recession the credit crunch, and will they work? PHiliP WatsoN Without doubt we will see change – the seems ill-advised, and all the indicators suggest this NB I would not rate them highly. The truth is the Dan Thomas Graham Harvey big question is what type. There is no question that year will be tough, with climbing unemployment, taxpayer does not have sufficient financial resources property correspondent for Senior associate at Scorpio momentum towards the establishment of tighter economic contraction and issues around inflation. to rebuild the balance sheets of the major banks, the financial times, with a partnership, a business regulation is underway. Disparate regulation in the and this has to be accepted by government and fresh beat that includes both Uk strategy firm dedicated to and global markets the global wealth industry past, such as the imposition of leverage ratios, the People are worried that the recession could usher in policy developed accordingly. An examination of risk weighting of assets and – even more a new era of global protectionism. Do you think that most banks’ balance sheets reveals a large liability fundamentally – the meaning of capital, has led to will happen, and what would be the consequences? component in the shape of bonds. They should be some confusion. This has led to differing scenarios NB There is certainly a risk of this type of knee-jerk obliged to convert these to equity in a manner akin emerging across geographies. Remedies, therefore, reaction. I happen to think, however, that the credit to the recapitalisations by creditors seen in most also differ. A transparent, globally coordinated and crisis will only be solved by concerted international other industries. The government should participate harmonised approach with adequate resourcing action that will eventually occur on a properly alongside to a restricted extent, perhaps only at a would better support today’s global markets. Bank coordinated basis. This approach will be level necessary to protect depositors. nationalisations, whether partial or complete, may fundamentally incompatible with the adoption by serve to speed the process, too, though it is individual countries of strongly protectionist PW This is a difficult question to assess. There was conceivable that immediate concerns, such as policies. Conversely, therefore, were a mood of no dress rehearsal for the crunch. Furthermore, easing credit conditions, may in the short term lead strong protectionism to take root, then I think this governments responded in different ways and over to looser bank capital constraints. would hamper efforts to restore the flow of differing lengths of time. In my opinion, the key international credit and greatly prolong the issue here is how governments interact with their GraHam Harvey There will be regulatory change, as recession. I think we will see a little protectionism global counterparts to manage this international public and shareholder pressure on financial going on for domestic political reasons, but not at a economic reality, while also managing their institutions, especially those partly or wholly owned level that will be critically dangerous. electorates’ local fears and concerns. • 8 c it iprivatebank.com k ni ght f r a nk .com 9
  • 8. monitor Future wealth trends Future wealth trends monitor ussia’s economic performance over the Equities have plunged. Safe government debt yields the public attitude to past eight years has been astounding. almost nothing. Risky commercial debt is worth banks during the crunch Between Vladimir Putin becoming prime next to nothing. Worst of all, our sensible, wealthy Russia in figures... minister in 1999 and stepping down as president last year, GDP rose more than six times in nominal Russian may be facing demands from friends and associates to repatriate some money to repay $386bn A survey by the All-Russian Public Opinion Research Centre (VTsIOM), ‘People and Banks Amid the The nation’s foreign Finanical Crisis: What Should Depositors Do?’, terms. Poverty halved – only a sixth of Russians live favours and help them out. For those scrambling currency reserves on conducted in October 2008* below the breadline, compared with one-third when for cash, one option might be to sell a prized 4 February, down by more he took office. Once a basket case, Russia became property in London or New York. But the weakening than a third from their peak of $600bn in August 2008. PeoPle who have one of the largest economies in the world, paying residential property market means that these flats % 40.6% 59.4 40% bank dePosits off its debts and building up a $600 billion foreign and houses, bought at the top of the market, may be (% of the total currency reserve. worth considerably less. number of The drop in value of the respondents) Yet look a bit more closely and the results are less The most likely solution is an uncomfortable one: rouble in the six months to impressive. Russia failed to diversify its economy. thrift and patience. The bad thing about being rich 4 February. The currency Are not AFrAid oF hit a historic low against The number of small and medium-sized enterprises is that you have expensive habits. The good thing is the dollar at a few kopeks losing their money *the Vtsiom conducted the proactive nationwide survey among 1,600 respondents in 140 settlements in 42 regions, territories and republics of russia in october 2008. the margin of error is within 3.4%. shrank. Reform in public service faltered. Plans for that you can always cut back on them in a downturn. short of 41 roubles. new roads, schools, hospitals and power stations The bigger questions are about what the were much-publicised but rarely completed. future holds. Firstly, will the current traumas and 8.7% Are AFrAid oF losing their money Corruption rocketed. As Boris Nemtsov and economic pain in Russia herald a future in which The fall in industrial output in November 2008, e xPert oPinion Vladimir Milov have pointed out in their seminal wealth is held more widely and more durably? compared with the previous pamphlet, Putin: The Bottom Line, the results of the Economic downturns have one good feature: they year, according to figures the safest way to save Money WiLL ThE past eight years are actually rather feeble. The same highlight the faults of badly managed businesses. published in December. (% of the total number of respondents) point is made, from a different quarter, by Igor Yurgens, who runs a think tank close to the Russian That can give the well-managed competitor a chance to move in. For now, the story in Russia is $42.8 property 51% BEar The average price for Urals president, Dmitri Medvedev. of the politically motivated bailout. But over the crude oil on global markets gold And Jewellery 19% So when the financial crisis hit Russia, the economy as a whole, the downturn will see more bad in January this year. The sberbAnk (russiA’s lArgest bAnk) 17% country was more fragile than it should have been, businesses go bust than good ones – and that is an budget forecast an oil price BuckLE? opportunity for the entrepreneurial class. of $70. roubles in cAsh 13% given the recent bonanza. The stock market has plunged by nearly three-quarters. The rouble – once a symbol of Russia’s recovery from the 1998 Secondly, will the business class in Russia develop a political voice? One of the startling 13.8% shAres oF compAnies 8% The rate of inflation last Foreign cAsh currency 7% economic crisis – has been steadily devaluing. features of opinion poll surveys over the past russia has seen huge levels of wealth creation in November. One of the Investors who hold Russian commercial debt eight years has been the clash between Russians’ biggest macro-economic recent years. edward lucas, a leading commentator problems over the previous are twitchy. Inflation is high and unemployment appreciation of higher living standards and complaints of business – about tax rules, about bad on the country, evaluates what the global recession is rising. The rickety financial system has not political stability, and their generally gloomy two years, inflation remains roads and about silly regulations – are the stubbornly high. will now mean for its economy and super rich collapsed, but it is in poor health. For many who feelings about the nitty-gritty performance of foundation of political pluralism. have done well out of the past eight years, these are the government. Is corruption getting better or Thirdly, if the business people of Russia do i l l u s t r At i o n b y l u k e w i l s o n worrying times. worse? Worse, say the polls – and president Dmitri demand a better deal, will the Kremlin actually A sensible, wealthy Russian would typically Medvedev agrees. Are elected representatives pay attention to them? For now the arguments diversify his assets and income streams: some following their own interests or those of their seem finely balanced, with people around would be inside Russia – perhaps in the company voters? Their own. Are public services getting Medvedev, such as the economist Igor Yurgens, or job where he first made his fortune. Then there better or worse? Worse. And so on. saying that the time has come for more political might be some property in London, plus a mix of For anyone doing business in Russia, the costs and economic openness, and some people around blue-chip equities and government securities, with of the overloaded infrastructure and predatory Putin saying the opposite. On the outcome of that a few holdings in hedge funds and more exotic officialdom are burdensome and infuriating. Yet, hangs the future of Russia’s new middle class – and investments, perhaps with leveraged bets at brokers in Moscow or London. so far the business world has preferred to keep its head down and enjoy the profits rather than much else besides. • For the truly unlucky, all those have gone sour complain about the costs. With the downturn, Edward Lucas is the Central and Eastern Europe at once. The brokers are demanding margin calls. there is just a chance that this will change. The Correspondent for The Economist. 10 c it iprivatebank.com k ni ght f r a nk .com 11
  • 9. Attitudes Attitudes to wealth Attitudes to wealth Attitudes pHotoGrApHy: richard powers re Se arch t’s tempting to assume that wealth insulates Survey DiStribution enough to have increased their exposure to equities. quickly. Many investors also acknowledge the Changing HNWIs from the day-to-day worries associated Bank accounts have been the biggest beneficiary long-term nature of property investment: even with economic downturns. Surely, when you are from the flight away from stock market volatility – if values fall your asset is unlikely to disappear % worth millions or even billions, it doesn’t matter almost 60% of those represented by our survey have completely. Despite this, a significant number 33 28 fortunes % if stock markets fall a bit or your house is worth substantially increased the amount they have on of HNWIs have either increased or reduced their less than you paid for it. However, according to the deposit. The perceived safety of the bond markets is exposure, with a very small percentage increasing results from The Wealth Report’s Attitudes Survey, reflected by the fact that 67.8% of respondents have it substantially. 7% which was completed by a global spread of Citi 1 22% increased their exposure to this kind of investment. This ambivalence is probably a reflection of the The results from The Wealth Report’s Private Bank’s wealth managers acting for almost But uncertainty about the ability of even national diversity of the property market and the attitude of HNWI Attitudes Survey provide a unique 2,000 of the world’s richest people, that is not the governments to repay increasing levels of debt could the wealthy towards it. While stock markets around europe & russia window on how the credit crunch is case. The wealthy have the same preoccupations and Americas explain why 14.3% of people have decided to reduce the world have all been heading one way only, affecting the behaviour and attitudes of concerns as everybody else. If anything, they keep an China, se Asia & Australasia their exposure to bonds. property markets have not reacted homogeneously. even closer eye on their investments and react more middle east, indian As our PIRI survey on page 26 confirms, the wealthy towards their property and subcontinent & Africa investment portfolios. Knight Frank’s quickly when markets start to change. property As An investment performance has varied widely. In those areas where Andrew Shirley analyses the numbers When looking at bricks and mortar as an investment values dropped fastest and furthest, canny HNWI Asset Distribution class, the picture becomes less clear. The majority investors are sensing the bottom of the downturn is There has already been a substantial shift in asset of HNWIs appear to be sitting on the fence at the imminent and are slowly reinvesting. distribution among the rich, who appear to have moment, with 57.1% making no change to their Experienced investors realise we are firmly into taken decisive action to mitigate risk and protect property portfolios, although over 90% have seen the bargain-hunting stage of the property cycle, their wealth (see bar chart on page 14). Although their property portfolios decrease in value during especially in the commercial and newbuild sectors. the creation of fortunes is often associated with the credit crunch, with about a third of those hit by a A number of survey respondents said their clients risk and daring decisions, safety first seems to be substantial decrease (see the graphs on page 14). were actively looking to take advantage of distressed the mantra in times of economic turbulence, with The illiquid nature of property probably goes sales to cheaply acquire stable assets with good both transparency and stability highly valued. Based some way towards explaining this lack of action. yields. Many fortunes have been property-based and on this survey, almost 90% of HNWIs have either While an entire portfolio of stocks and shares can a large proportion of the HNWI community has a decreased or substantially decreased their exposure be sold with just a few taps on a keyboard, it is passion for property ownership. According to our to equities, while virtually all have moved away from more difficult – and sometimes almost impossible survey, property accounts on average for 30% of their hedge funds. A small proportion, 7%, feels confident – during an economic downturn to sell property asset portfolios. But even this enthusiasm has 12 c it iprivatebank.com k ni ght f r a nk .com 13