Revealed: how the ultra-rich protect and grow their wealth in a crisis
Alex Ogario, Head of the Private Office at Knight Frank Finance explores how shrewd investors have maximised the potential of debt to protect jobs, optimise returns or to be more nimble than competing buyers during the Covid-19 pandemic
5 minutes to read
The Covid-19 pandemic has been a brutal reminder of how quickly conditions can change in a crisis.
Everywhere you look during the past 14 months, change happened at breakneck speed. Whether it was a 72% decline in international tourist arrivals at airports between March and October, a 20% crash in the Dow Jones Industrial Average between February and March or the 16% third quarter rebound in UK GDP; these numbers will be studied with awe by economists for decades to come.
Not all capital can move this quickly. At various key moments, ultra-high-net-worth individuals have found themselves ill-prepared for a world transformed overnight. Many portfolios, though carefully planned, were packed with illiquid investments, leaving investors unable to react with the speed needed to match the manner in which markets were moving.
The global economic picture is improving, but pandemic-related disruption is set to continue. In The Wealth Report 2021 Knight Frank analysed responses from more than 600 private bankers, wealth advisors and family offices across 50 countries, representing combined wealth of more than US$3.3 trillion to see what the world’s UHNWIs are thinking. Some 80% said ongoing disruption from Covid-19 is the biggest issue affecting their clients’ wealth during 2021.
Debt comes into its own in conditions like this. Since the onset of the crisis, shrewd investors have maximised the potential of debt in order to protect jobs, optimise returns or to be more nimble than competing buyers. That has manifested itself in a number of ways:
Borrowing for businesses
Firstly, more than 100 lenders provided finance via the Coronavirus Business Interruption Loan Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS). The programs, introduced by the government in May 2020, allowed small and medium-sized firms to access finance up to £200 million.
Like the furlough scheme, this was a smart move by the government that has saved jobs on a massive scale. Many wealthy individuals are large employers, and the loans enabled many to avoid making redundancies while they reallocated capital tied up in more illiquid investments. As of March 2021, officials had approved 98,344 loans worth more than £23 billion via the CBILS and 716 loans worth £5.3 billion via the CLBILS. Due to these combined measures, unemployment looks set to peak below 6% - a figure thought impossible only a few months ago.
Reallocating capital
We’ve also been working with wealthy homeowners seeking to take out mortgages on prime properties in order to reallocate funds elsewhere. By way of example, we have just secured a prime mortgage for a client at 1.09% over the base rate, which the Bank of England this month held at a record low 0.1%.
The loan, available up to £10 million for particular client profiles, was on an interest only basis over a five year term with an arrangement fee of 0.25%. This is exceptionally cheap money by historic standards and is particularly attractive amid the inflation of global asset prices prompted by low rates and huge fiscal stimulus.*
These products also reveal why property debt in its various forms is always on the menu of strategic wealth managers. Product innovation, particularly in sectors like Equity Release, offer new ways to reallocate funds to secure other significant benefits, including minimising inheritance tax bills.
Domestic investment opportunities
Finally, we’ve worked with individuals seeking to move quickly while overseas investors are out of the market. Much of the data we’re seeing suggests a rebound in international purchases is imminent, and domestic buyers able to act now stand to benefit from any subsequent increase in capital values.
The £10 million-plus property market provides a useful barometer for this trend, with overseas buyers accounting for between two-thirds and three-quarters of sales in recent years. Viewings of properties fell 36% in the year to January while travel restrictions prevailed. During the same period, new prospective buyers registering climbed 109%. If even a fraction of those decide to transact once travel becomes possible, we are in for a very busy market.
It’s worth remembering the pandemic has also given us a glimpse of the other side of the coin. At the outset of the crisis, when economic uncertainty was at its peak, lenders withdrew while they assessed what might happen next. The subsequent lack of liquidity, though temporary, left many borrowers with few options to protect their wealth.
Longer-term strategy prevailed. Many lenders in this space have been slimming down investment banking divisions in favour of wealth management. Strategically, these institutions view relationships with high-net-worth-individuals as a more stable and ultimately more profitable choice for the coming economic cycle. With the right advice, however, it is the wealthy that stand to gain the most.
The cost of debt is at record lows and the global economy is set to expand 5% this year, according to the OECD. That makes now a great time to assess your borrowing potential in order to ensure you’re properly positioned for the opportunities that lie ahead. To discuss your options, please don’t hesitate to contact me, alex.ogario@knightfrankfinance.com, +44 20 7268 2573.
*The choice of interest rate and product terms will depend on your circumstances and the amount of the mortgage. Before you make a mortgage application, we will carry out a full review to establish your needs and preferences and if you meet the criteria, we will give advice and make a recommendation to you. We do charge a fee for mortgage advice. All mortgages are subject to status. Please note that all products show an indicative rate only and may not be suitable for you. You must be 18 or over. Your home may be repossessed if you do not keep up with mortgage payments.