Amid the turmoil in financial markets
triggered by the US subprime real estate crunch, the number of
wealthy people declined in Europe in the closing stages of last
year. Ominously, this marked the first fall after six years of
uninterrupted growth.

The number of high net worth individuals in the European Union
declined by 0.83 percent in the fourth-quarter of 2007, marking the
first quarterly decline since 2002 when investment markets were
still being sideswiped by the great dotcom technology bust.

Still, the number of wealthy people in Europe increased by 7.41
percent in 2007 as a whole to reach 2.76 million by January 2008,
according to Market Dynamics Research & Consulting (MDRC), a
UK-based wealthy consultancy.

In a new report, Dimensions of European Wealth 2008, MDRC found
that the “sharp decline” in asset values during the second half of
2007 put a brake on the growth in the number of rich
individuals.

Among individual countries, the UK remains the home for the largest
number of rich, accounting for 20 percent of Europe’s wealthy. The
rise in the number of the UK wealthy reflects a big increase in
property prices, readily available credit, particularly for
property development, a strong SME sector, relatively benign taxes
and corporate regulation and, crucially, the UK’s success in
financial services.

MDRC thinks the UK may have an “Achilles’ heel” given its
dependency on property and the financial sector. Since 2005 over 55
percent of the growth in numbers of rich individuals has emanated
from these two sectors, and an even higher proportion in the £1
million plus ($2 million) wealth segment.

The fallout from the credit crunch has been to reduce to flow of
credit for speculative property transactions, to reduce the number
of individuals in asset management and investment banking receiving
very high bonuses and to cause an absolute reduction in the value
of financial assets, resulting in that fourth-quarter fall in HNW
numbers, MDRC says.

In contrast, the high net worth markets in France and Germany are
much more broadly based, MDRC observes. HNW sector growth has come
from increases in existing wealth as well as creation of new
wealth. Although there is a significant number of HNW individuals
connected to the financial services in both countries, a far
greater proportion of HNW individuals in both France and Germany
are entrepreneurs, business owners or executives.

 

 

 

 

 

 

 

 

The continued growth of HNW wealth is closely linked to the success
of the medium-sized corporate sector. The ready availability of
credit is a key driver for the corporate sectors in both countries
and the tightening of credit will be a brake on the growth of HNW
individuals, the researchers noted.

HNW numbers in the Benelux region have grown steadily in recent
years, but the growth of HNW individuals has been driven by
increases in the value of existing wealth, rather than the creation
of new wealth. In particular, the stock of wealthy corporate
executives, an important sub-segment of the HNW market in the
region, has gradually declined and is not being replenished.

In Italy, HNW numbers grew steadily in 2007 but at a slower pace
than in the other large EU economies. The HNW $1 million plus
sector is a mix of new wealth and inherited wealth, but
conservative investment preferences, restrained property values and
a tendency for wealth consumption have constrained the growth of
existing wealth.

Spain’s impressive economic growth has generated a large number of
individuals in the affluent and sub-HNW sectors. Growth in HNW
numbers during 2007 has been slightly lower than would be expected
from this magnitude of personal wealth generation, but increases in
existing assets plus new wealth creation suggest that HNW growth is
probably more sustainable than in many EU countries, MDRC
reckons.

Portugal, in contrast, has seen HNW wealth creation at the lower
end of the core 15 EU states. The EU expansion into Eastern Europe
has erased Portugal’s historic competitive advantage, particularly
in the manufacturing and agriculture sectors, and the service
sector has become Portugal’s largest employer.

Ireland’s HNW sector has expanded strongly as the Irish economy has
flourished with high GDP growth. Although in 2006 HNW growth in
Ireland was the highest in the EU15, HNW growth peaked in the first
quarter of 2007 and there was a gradual slowdown through the rest
of the year – linked with a declining residential property
market.

The Czech Republic, Slovakia and Poland have the fastest-growing
rich segments, with annual growth rates of 11 percent, 10.7 percent
and 10.4, percent respectively, according to MDRC data.

CEE still on a roll

The competitive advantages enjoyed by Central European states since
2004 have transformed these economies and created individual wealth
at an unprecedented rate, MDRC noted. The rise in property values,
booming construction and encouragement of entrepreneurs has created
a number of wealth ‘hotspots’ such as Wroclaw in Poland, where the
HNW segment is large and growing.

In both Russia and Ukraine nearly all HNW individuals are
first-generation millionaires, the majority being entrepreneurs in
both the manufacturing and service sectors of the domestic market,
MDRC research showed.

In both countries, wealth creation has accelerated in recent years
as structural reforms have successfully started to transform the
economies.