The current turmoil in the global economy has driven high net worth individuals (HNWIs) to invest in prime real estate in safe heavens, which has led to rise in prices of prime properties in cities like London, New York, Paris, Shanghai, Guangzhou, Dubai and Sydney among others.
In India, too, the property prices in Tier I have risen sharply in the last one year. Prime residential and commercial properties in relatively risk-free locations have always attracted investors in times of economic and political turbulence, Knight Frank said in a report. There is something comforting about tangible assets that, barring natural disasters, will retain their inherent value over time, even if prices dip in the short term.
This flight to safety continues around the world and is helping drive prices in the most sought-after locations; so much so that certain governments are desperately trying to cool their housing markets down. But wealthy investors are also starting to buy into recovery, breathing new life into previously moribund markets like Dubai and Dublin.
Interestingly, in most countries, the governments have taken a number of measures like imposition of higher taxes on the transactions of prime properties and limits on multiple-home ownership to discourage the price rise.
According to Prime International Residential Index (PIRI) of Knight Frank, the measures taken by the Chinese government include limits on multiplehome ownership, restrictions on mortgage availability and, in some cases, a prohibition on nonresident purchases.
Despite these new controls, the weight of money chasing prime property in Shanghai and Beijing has been sufficient to ensure continued price growth in both cities throughout 2012, the report says. The situation is similar in Hong Kong where, despite new restrictions - most notably an additional 15 percent stamp duty for foreign buyers, including those from mainland China - the rate of price growth almost doubled from 4.6 percent in 2011 to 8.7 percent in 2012, PIRI says.
In its report, Knight Frank says that the power of global capital flows not only affects market performance, but also causes governments to attempt to control and limit this influence. "Counter-intuitively, one of the biggest risks for global luxury residential markets is actually their popularity, which encourages a deep concentration of investment," the report says.
According to PIRI, the number of HNWIs - individuals with more than $30m (Rs 165 crore) of investable assets -is forecast to rise to 2,85,665 globally over the next decade, up by 95,000. To put this in perspective, the combined annual GDP growth of Brazil, Russia, India, and China is equivalent to the creation of a new economy the size of Italy each year.
With such a large growth of HNWI, the report says, demand is ever rising while the stock of desirable locations remains virtually static, and so global capital flows continue to concentrate on a few key hubs, pushing the prices northwards. The resulting lack of local affordability becomes a political issue and, in an attempt to slow down price growth, governments are imposing new rules.
In markets from Dubai to Sydney, by way of Shanghai and Singapore, PIRI said, restrictions are being placed on multiple-property purchases and caps imposed on loan-to-value ratios.
Even in Europe, a 20 percent cap on second homes in Switzerland, as well as new regulations targeting London's £2 million plus market, have been introduced. As wealth creation grows, we can only expect more attempts by governments to control the flow of money into residential property.
London's new £2 million plus stamp duty tax regime highlights a related theme. For governments that badly need to raise revenue, the luxury property market is looking like a suitable - and voter-friendly - target. France, Italy, Spain, and Portugal have all joined the UK in introducing new or enhanced taxes on the sector over the past year, the report says. However, UK's coalition government scaled back the new stamp duty proposal on £2 million plus property last December following a negative reaction from the market.
Despite governments' measures to contain transactions in the prime property segment, the demand for luxury homes in key cities worldwide showed no sign of abating in 2012. Rather, the instability of the global economy promoted luxury homes to safe-haven status among the world's wealthy. Last year, on average, just over a quarter of HNWIs' total net worth was accounted for by their main residence and their second homes, the report says.
The attraction of storing wealth in tangible assets looks set to continue. A net balance of 25 percent of respondents indicated that their clients will add to their residential portfolios in 2013, compared with 19 percent in 2012, the report says.
As the wealthy consider their options, it is important to note that as a result of the action of policymakers and wider political rhetoric in Europe, Asia and the Middle East, property markets around the world have new challenges to overcome in 2013, not least adjusting to new tax rules.
The PIRI survey suggests that wealthy clients are prepared to take action in response to higher levies and a lack of transparency in their current places of abode. Some 60 percent of Europeans, 61 percent of Middle East and African clients, 67 percent of those based in Russia and CIS and 73 percent of Latin Americans were said to be considering, however tentatively, changing their country of residence or domicile.
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