In the preamble for the Knight Frank Wealth Report 2020, Rory Penn, head of private office at Knight Frank, wrote excitedly of the approaching decade – the roaring twenties – and the implications of such for UHNWIs around the world. Through no fault of his own, the report’s predictions were, let’s say, a little off. ​​​​​​​Hannah Wright reports

In all fairness, the predictions veered in the right direction, it was simply that the true events of 2021 were “supercharged” by the pandemic, as Penn describes. Behavioural shifts that might have unravelled across five to ten years, played out within a matter of months.

Harnessing data and insights from global research teams, the Knight Frank Wealth Report attempts to predict what may come next in residential and commercial real estate markets. This, in turn, enables clients to capitalise on such opportunities.

Fortunately for Knight Frank, the global response to the pandemic favoured the wealthy. As interest rates fell and fiscal stimulus increased, asset prices around the world surged. This, in turn, pushed up the global population of UHNWIs by 2.4%. In Asia, this figure soared to 12%.

Knight Frank’s model predicts that this growth will continue over the next 5 years, with an UHNWI population growth of 27% – and 39% in Asia specifically. The Chinese mainland is key to this phenomenon with 246% forecasted growth in very wealthy residents by 2025.

At the beginning of a new economic cycle, Penn believes the post-pandemic world promises “significant opportunities for wealth creation and growth”.

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Highlighting the opportunities created by the pandemic, Penn continues: “A full 87% of respondents said that this was an exciting prospect, with half citing tech disruption as a prominent opportunity in particular.”

This was a consistent theme across the 15th edition of the Wealth Report, “with more than two-thirds (71%) expecting their clients’ wealth to increase in 2021 – the greatest degree of optimism we have ever reported” Penn adds.

The threat of inequality

Overshadowing this optimism, 80% of respondents to the Knight Frank Attitudes Survey believe the ongoing disruption is a risk to wealth creation. Notably, the report cites inequality as a threat to wealth accumulation.

According to the report, growth in wealth inequality will fuel demand for policies aimed at curbing imbalance. We are witnessing a K-shaped recovery with industries and populations recuperating at different paces.

A team at Harvard University found that between February and October 2020 in the US, workers in the bottom quartile saw employment drop by almost 20%, while among those making more than $60,000 per year it rose by 1%. Increasing inequality could subsequently have an impact on domestic policy and tax issues, with a shift to more wealth taxes. The report highlights that governments may also be focused on “replenishing public finances hollowed out by the Covid-19 pandemic.”

Indeed, Argentina introduced a new wealth tax in 2020, whilst South Korea raised taxes for owners of multiple homes. In Canada, Justin Trudeau announced plans to spend billions on childcare, housing, and healthcare, partly financed by taxing “extreme wealth inequality”. Changes have also been mooted in Spain, the US, and the UK.

In the UK, the Wealth Tax Commission released a report on the potential for a one-off wealth tax, aimed at raising additional revenue in response to the extraordinary costs of Covid-19.

However, such a move seems unlikely, given chancellor Rishi Sunak stated recently that he would not engage with a one-off wealth levy, rendering the idea as distinctly “un-conservative” and unaligned with party ideology.

Reassess and refocus

After a year of reflection, Penn believes Covid-19 has presented an opportunity for individuals to “reassess and refocus” subsequently spurring a new wave of wealth creation.

He commented: “The level of new businesses in the UK, US and other countries is a testament to the entrepreneurial spirit – something which bodes well for wealth creation. Against this backdrop, we are forecasting the highest anticipated growth in level of millionaires (41%) to date.”

Whilst Asia is the one to watch, the US is expected to remain the dominant source of wealth now and into the near future. Penn explains: “In recent years, US hegemony has seen itself pitted against significant challengers. The Chinese mainland, for example, has almost doubled the rate of the US’ forecast growth at 46%, though it’s important to note that the country is starting from a lower base.

“In reality, the US will remain the dominant source of wealth now and into the near future. We expect 24% growth over the next five years, with almost 44,000 newly minted UHWNIs set to join the swelling ranks. And come the year 2025, the US is still forecast to have more than double the number UHNWIs overall.”

Among those successfully preserving and increasing their wealth, the report cites three key drivers: diversification, equities, and property.

Explaining the importance of diversification, Penn says: “Those with diverse portfolios across geographies and asset classes proved most resilient last year and we could see this trend and its subsequent positive impact on wealth prospects continue into this year again as well.”

Accounting for nearly a quarter of UHNWI wealth portfolios, equities were also a major driver of wealth growth in certain regions, with ESG investments taking centre stage.

Delving into the figures, Penn says: “There’s opportunity abound in the ESG arena with almost a quarter overall viewing it as such, and double that number looking solely at Australasia.”

More than 40% of UHNWIs are more interested in ESG focused investments than they were 12 months ago and 22% are excited by opportunities arising from the ESG agenda, with those in the UK, Australasia and North America the keenest.

The arc of global geopolitics is also playing a huge role in wealth creation, with a significant focus on the issues of technology, privacy rights, sustainability, and the green agenda.

“What is new, and notable” the report writes, “is the growing convergence between them, and the increasing interplay with government agendas.”

Penn continues: “The recent swathe of geopolitical change also plays into this environment of growing international opportunity and wealth generation. Almost a third of respondents cite improving geopolitics as a positive for growth, particularly in Asia where the large new regional trade deal will offer opportunity for expansion.”

Recognising sensitivities and identifying where pressures may build is imperative to minimise risk and maximise opportunity.

The concrete jungle, transformed

As the largest single element in the average UHNWI portfolio – 27% according to the Attitudes Survey – property values and holdings play a significant role in total wealth levels. There is activity at every angle – house prices are increasing, demand for development land is rising and a significant proportion of respondents are angling to upgrade.

Despite speculation that house prices were falling, within the prime residential market, average price growth has accelerated over the last year. According to Knight Frank’s Prime Residential Pricing Index, Auckland lead the way with average prices ending the year 18% higher, perhaps attributable to New Zealand’s successful handling of the Covid-19 pandemic.

After a year spent inside, 26% of UHNWIs are planning to buy a new home in 2021, with the biggest driver the desire to upgrade main residences. This growth in demand was predominantly for domestic rural and coastal properties, with access to open space cited as the most highly desired feature.

In 2021, luxury housing prices are expected to continue to rise by 2%, with Seoul leading such growth at 7%. Only two cities, Dubai and Buenos Aires are forecasted to see prime values decline.

The third most popular investment pick for this year was development land. In 2021, the city leaders for wealth, investment, business heft and innovation were unsurprisingly – London and NY. For wellbeing, Helsinki and Madrid take the lead.

London saw the highest levels of cross-border capital from the widest range of different countries with a value of $4bn across the 12 months to September 2020. Education is a key driver for prime demand among Asian and African UHNWIs, accounting for 10% of property purchases.

Introduce wellbeing into the mix, and it’s a whole different story. According to Knight Frank, the urban hotspots of the future will be determined by three factors – wealth, innovation, and wellbeing.

Named the Knight Frank City Trifecta, the report argues that, for aspirational cities, a focus on innovation and wellbeing could be the key to attracting or retaining free-spending inhabitants. Top of the City Trifecta 2020 is Munich, followed by Tokyo and Paris.

According to Professor Saskia Sassen: “History has shown us that cities rise and fall, but always rise again.”

The pandemic, far from undermining the city, has shown the potential for rebirth.