The number of ultra high net worth individuals increased 12.2 percent in 2006 compared with 11.3 percent worldwide, a survey of Asia-Pacific wealth carried out annually by Merrill Lynch and consultancy Capgemini found. The assets of the wealthy, from conventional millionaires through to the ultra-wealthy, will increase by an annual 8.5 percent to $12.7 trillion in the next four years, according to the study. The actual number of wealthy in Asia grew to 2.6 million, up 8.6 percent during 2006.
Overall, the wealth of Asia’s HNW – individuals with more than $1 million in assets – grew 10.5 percent to $8.4 trillion in 2006 from a year earlier, the survey showed. Assets held by the wealthy in Japan and China made up a whopping 64 percent of the total. Overall, Asia-Pacific accounted by 27.1 percent of the global HNW population last year.
Asia-Pacific was home to five of the ten fastest-growing markets for HNWIs. These included Singapore, India and Indonesia, where the HNWI populations grew by 21.2 percent, 20.5 percent and 16.0 percent, respectively. That compared with the global HNWI expansion of 8.3 percent. Korea and Hong Kong were also in the top ten fastest-growing markets globally.
Rahul Malhotra, head of Asia-Pacific, Merrill Lynch Global Wealth Management, said: “While HNWI investment behaviours differ from market to market, the underlying drivers of wealth remain strong overall and we expect the region will continue to outpace the global rate of growth in HNWI wealth.”
Many of the ultra-wealthy with more than $30 million of net worth are being created in booming China. “Although the vast majority of Asia-Pacific’s HNWIs hold between $1 million and $5 million in net financial assets, we are seeing a sharp rise in the number of ultra-HNWs,” the report noted. “This is particularly evident in China, where that country’s phenomenal economic growth is reflected in a high concentration of ultra-HNWs. More than 28 percent of the 17,500 ultra-HNWs in the region are in China.”
In addition, the report found that the very rich in Asia are getting wealthier at a faster pace than the rest of the world. Last year, ultra-HNWs accounted for only 0.7 percent of the region’s wealthy but their financial assets represented 25.4 percent of all wealth – up from 24.4 percent in 2005.
This wealth consolidation among the super-rich is happening in all mature markets, but is fastest in Asia. Coupled with the brisk growth of less wealthy segments, Asia is “creating ample opportunities for leading wealth management firms to provide service at all levels of HNW wealth”, the report said.
On average, Asian HNWIs had $3.3 million of net assets, versus a global average of $3.9 million. The highest average was recorded in Hong Kong, with $5.4 million of net assets per individual.
Asia’s millionaires are allocating less of their investment portfolios to equities, averaging 25 percent versus 31 percent globally, the report found. The region’s wealthy showed a higher preference for real estate and cash than in other parts of the world: 30 percent versus a global average of 25 percent. South Korea’s rich devoted the most to real estate investments, at 42 percent of their portfolios.
“As an asset class, HNWs favoured real estate for a number of reasons,” the report observed. Interest rates in Asian economies have been relatively benign, salaries and savings rates both increased, real estate is a well-understood investment medium and few real estate markets have regained the levels prevailing before the regional economic crisis of 1997.
Singapore has one of the few real estate markets to surpass pre-crisis levels. In 2006, private residential property in the city state rose by 10.2 percent compared with 3.9 percent the previous year. Commercial real estate jumped by an even larger margin, with top office space prices increasing 17 percent.
The report cautioned: “By 2008, however, research suggests that Asia-Pacific HNWs will reduce their direct allocations to real estate – to 23 percent of the average portfolio – to more closely align with the projected global average.”
At the same time, non-traditional investment products are gaining in popularity as Asian investors seek better returns and foreign institutions seek involvement in the high-growth region. For example, real estate investment in Asia-Pacific has grown due to the strong performance of commercial property and real estate investment trusts.
Nonetheless, HNWs in Asia, like counterparts in other developing markets, continued to seek investments “that offer liquidity, security and low volatility”, the report observed. The rich in Asia held a larger percentage of their financial assets in cash or cash-equivalent asset classes – 22 percent – than investors elsewhere.
“This trend is accentuated by the region’s limited access to certain complex investment vehicles and alternative investments,” it noted. “Such investments could help diversify risk but they are still relatively rare in these markets.”
Across Asia, asset allocation differed significantly from market to market. Australian HNWs allocated 37 percent of their assets to equities, the highest level in the region. Investors in China and Indonesia also had relatively high equity allocations.
The survey showed that the region’s millionaires put more of their assets abroad as they gain greater access to global markets, placing 51 percent of their portfolios in domestic instruments in 2006 versus 56 percent the previous year. Asia’s wealthy boosted their investments in Latin America and the Middle East last year, while the proportion of assets devoted to North America was little changed at 27 percent, according to the survey.
These trends should accelerate. The report noted the wealthy in Asia increasingly look at internationalising their investment portfolios and, over the longer term, “rebalancing their asset allocations in favour of alternative investments, equities and fixed income”.
HNW investment behaviours differ from market to market in key attributes such as sources of wealth, demographics, concentration of ultra-HNWs and the level of portfolio internationalisation. The primary sources of wealth for China and Australia are business and stock options, whereas inheritance and income are the main sources for Japan’s HNWIs, the report said.
The majority of HNWIs in all markets are male. The proportions are highest in India, Australia and South Korea, at more than 80 percent. Females represent 43 percent of Taiwan’s HNW population and more than 30 percent in China and Hong Kong.
The report does forecast a major transfer of inter-generational wealth across Asia as many first-generation wealth creators begin to reach retirement age. Its analysis suggests that 54 percent of the region’s HNWIs are over 56 years of age and, in the coming years, intend to distribute 92 percent of their private wealth to family members and future generations.
Since many Asian HNWIs derive a significant portion of their wealth from business ownership, the transfer of their private holdings will be a “complex challenge that will force wealth managers to perfect – or develop – a specific set of multi-faceted skills and expertise”, said the report.
The use by HNWIs in Asia of multiple financial advisers will compound the difficulty that is often inherent in identifying what wealth is to be transferred, the report suggests, saying: “Most advisers find it a daunting task to achieve a level of client intimacy that would allow them to accurately assess these affluent clients’ entire wealth picture and, thereby, to present a range of options that would ensure effective inter-generational wealth transfer.”
To tackle such issues, wealth management providers are increasingly partnering and collaborating across jurisdictions with legal and accounting experts to provide necessary insights that will help their clients effectively structure disbursements of wealth.
The report confirmed what has been increasingly apparent – that Asia is now a honey-pot for an increasing number of private banks, local and Western.
“The intensifying competition for HNW clients, the strong growth in HNW wealth and numbers and the varying individual product maturity across HNW markets, pose significant challenges and complexities to the financial advisory firms servicing these markets,” it said. “Already we are seeing sharper pricing, product commoditisation and a shortage of qualified advisers across the region.”
The relentless growth of non-resident Indians
More than 150,000 Indian millionaires reside outside of their country’s borders, making the non-resident Indian (NRI) sector one of the fastest-growing in global wealth, according to the Asia-Pacific Wealth Report.
Other recent estimates suggest that NRIs, broadly measured and including less wealthy investor segments, could now total $1 trillion in net assets. They generate more than $100 billion in income each year and in 2006 they remitted about $24 billion back to India.
As a result, wealth managers are becoming increasingly focused on servicing this market, particularly in Singapore and Hong Kong, which have become financial centres for NRIs. The greatest concentration of wealthy NRIs was in Hong Kong in 2006, the report estimated, but without quantifying this. The Chinese centre was followed by Singapore, Indonesia, Thailand and Japan. The smallest concentrations were in Australia and the Philippines.
Banks surveyed for the report indicated that a key to attracting NRI investors is to offer products and services exclusively to this community. More than 80 percent of the advisers polled said that confining their marketing efforts to the NRI segment has been effective in attracting and retaining wealthy NRI clients.
Another factor is that strategies should address the relative youth of NRIs. On average, the NRIs represented in its survey are considerably younger than the broader, global HNW population. Nearly 19 percent are between 31 and 40, compared with only 11 percent of the global HNW population. “The relative youth of the wealthy NRI segment highlights the need for advisers to establish dynamic relationship with these clients at an early stage,” the report said.