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Wealthy investors have confidence in real estate assets

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Despite economic and financial headwinds, high-net-worth individuals have confidence in real estate as an asset class and plan to increase their portfolio allocations to commercial and residential properties in the near term, according to a report prepared by the Economist Intelligence Unit and commissioned by Barclays Wealth.

“Now that real estate prices seem to be stabilising globally, wealthy investors are again thinking about increasing their allocations to this asset class,” says Michael Crook, alternatives strategist at Barclays Wealth. “But it’s clear from the survey results that the demand from high-net-worth investors for real estate will depend on the availability of credit and the sustainability of the global economic recovery.”

Of those surveyed, 75 per cent of respondents say that residential real estate looks attractive from an investment perspective, but 60 per cent of those same investors note that tight credit conditions are preventing them from taking the plunge.

In addition, 26 per cent of wealthy investors believe that real estate has better long-term prospects than other asset classes. Just more than half of the respondents expect an increase in the value of their real estate investments over the next two years. Almost 40 per cent of respondents with assets of USD50m or more have greater than 50 per cent of their portfolio in real estate.

“The survey has revealed that investors are holding a much higher proportion of their wealth in real estate than we would normally recommend,” says Michael Dicks, chief economist at Barclays Wealth. “This suggests a real need for people to consider diversifying their portfolios into other asset classes in order to reduce risk.”

Among the key advantages of investing in residential real estate, respondents cited potential for rental income (38.3 per cent); capital gains potential (28.6 per cent); long-term performance track record (27.1 per cent); overall portfolio diversification; and tangibility of brick-and-mortar investments (19.2 per cent).

Just over 75 per cent of those surveyed invest primarily in their domestic real estate markets. Asked though about the overseas country in which they saw the greatest investment potential, a number of interesting points emerged.

The US is regarded as the most promising real estate market by some margin, with 16 per cent of respondents selecting this market. Following the US, China and the UK are tied as second-most appealing real estate markets, while India is just behind in fourth place. France, Spain, Canada, Brazil, Germany and Australia rounded out the list of top ten markets.

In addition, the research shows that among the ten countries and regions that were most heavily represented in the survey, investors from Middle Eastern countries and Canada are most likely to increase their allocations, while Spain is the only country in which average allocation to real estate is predicted to fall.

“Within the context of their existing real estate portfolios, it is encouraging to see that some respondents are looking overseas,” says Dicks. “However, there is evidence in the report of ‘home bias,’ when investors prefer to focus on the market they know best. Diversification overseas is an important means of avoiding an excessively concentrated real estate portfolio and investors also seem to under estimate how straightforward it can be to achieve this through vehicles like Reits.”

The report highlights the distinct role gender plays when investing in real estate. Almost half (49 per cent) of the women surveyed consider real estate to be a less risky investment than stocks, compared with 37 per cent of men agreeing with that view.

In addition, women are much more likely to enjoy investing in real estate than men: 44 per cent of women surveyed find buying property more enjoyable than investing in other asset classes. Only 28 per cent of men feel the same way. While 34 per cent of men are likely to invest in real estate indirectly through a fund, only 14 per cent of women would prefer this approach.

The report, entitled “Prospects for Property: On Solid Foundations?” polled over 2,000 wealthy individuals globally in August and September 2009.

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