How money is moving around the world

The Wealth Report assesses the factors driving capital movements around the world and takes a detailed look at wealth flows from three major hubs.

Words: Flora Harley, Senior Analyst, Knight Frank Research

At a glance

  • Governments around the world are targeting globally mobile wealth with a record 26% of global UHNWIs planning for emigration this year.
  • Some countires are actively enticing wealthy individuals to relocate with favourable tax regimes, while others are introducing overseas buyer taxation on residential purchases.
  • Singapore, Australia, New Zealand, Canada, the UK and other countries will make wealthy non-residents jump through ever larger hoops to access their property markets.
  • In England and Northern Ireland a consultation on an overseas buyer’s taxation is scheduled to begin in January 2019.
  • Conversely, a growing number of citizenship and residency by investment schemes are cropping up across the globe – the latest introduced in Moldova and Montenegro.
  • In emerging markets, growing economic risk could boost demand for such schemes as money is channelled to safer havens. 
  • 36% OF UHNWIs already hold a second passport, with 26% planning to emigrate.

China

In China, real estate is now classified as a “sensitive” sector, which means almost all investments into overseas property markets require stringent official approval, especially for large transactions.

Despite this, Chinese buyers are still looking at familiar global markets such as London, Sydney, Melbourne and Hong Kong, all of which offer language advantages and immigration possibilities. The worsening of the trade relationship between China and the US may cause Chinese investors to shift their presence into other key markets.

Data from our Attitudes Survey indicates that 36% of UHNWIs already hold a second passport, up from 34% last year, with 26% planning to emigrate permanently, up from 21%.

India

India is witnessing a substantial rise in personal wealth. The country’s UHNWI population has grown by 30% in the past five years, according to data from Wealth Insight, fuelling an increased appetite for overseas real estate investments. 

Typically attracted by world class education opportunities for their children, new business ventures and stable investment returns, coveted markets such as London, Melbourne and Dubai draw significant interest from Indian buyers.

Despite the restrictions in place under the Liberalised Remittance Scheme (LRS) - a remit up to US$250,000 overseas per financial year, per resident - there is a clear and growing interest from Indian nationals to invest abroad.

Since the implementation of the higher limit, Indian residents have sent nearly US$30 billion overseas, with remittances up by 144% between the 2015/16 and 2017/18 financial years.

Middle East

The spread of private wealth across the Middle East is centred on the major Gulf States with Saudi Arabia taking the top spot, followed by the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain. While oil income boosts government revenues, the biggest source of wealth for the private sector have been the construction and financial services sectors.

Real estate remains a significant wealth preservation asset class. Middle Eastern investors have been longstanding players in global real estate markets, in particular in the UK, Europe and US London remains the top target destination, followed by other European cities like Berlin. In terms of sectors, office and hospitality remain as preferred segments.

However, following global trends and opportunities there is an increasing enthusiasm and consideration for more specialist sectors, such as healthcare, education and the private rented sector.

The full read

Wealth flows are influenced by many factors, including economic and personal stability and preservation of wealth. Understanding these drivers can help provide insight into the direction of investment flows, and how they impact on both residential and commercial property markets.

Increasingly, governments around the world are targeting globally mobile wealth, albeit for a variety of different reasons. Some are actively enticing wealthy individuals to relocate with favourable tax regimes, while others are introducing overseas buyer taxation on residential purchases.

Italy, for example, has introduced a new fixed rate tax payment of €100,000 on worldwide income for “non-domiciled” residents. Conversely, Singapore increased the foreign buyer stamp duty on residential property to 20% in July 2018. In England and Northern Ireland, a consultation on an overseas buyer’s taxation is scheduled to begin in January 2019.

The backdrop to all this is the increasingly footloose nature of wealth. Data from our Attitudes Survey indicates that 36% of UHNWIs already hold a second passport, up from 34% last year, with 26% planning to emigrate permanently, up from 21%.

Enabling this trend is a growing number of citizenship and residency by investment schemes, with Moldova and Montenegro the latest nations to jump on this particular bandwagon in 2018. However, as we reported in The Wealth Report Autumn Update 2018, the OECD has begun to scrutinise the potential misuse of these schemes.

In October 2018, as a result of an earlier consultation, the OECD released a “blacklist” of 21 jurisdictions, including Malta and Cyprus, that it believes threatens international efforts to combat tax evasion. Since the initial publication, some jurisdictions have been removed from the list after putting in place an exchange of information mechanism.

A similar study is being conducted by the EU. Portugal is just one country under the microscope, with the authorities there coming under fire for issuing a golden visa - permanent residency, in return for a financial investment - to a Russian national wanted by Interpol.

Emerging woes

However, growing economic risk in emerging markets could boost demand for such schemes as money is channelled to safer havens. The International Monetary Fund (IMF) lowered growth forecasts for emerging markets from 4.9% in 2018 and 5.1% in 2019 to 4.7% in both years due to heightened economic uncertainty and upheaval.

This concern is partly the outcome of trade tensions between the US and China, as well as a result of investors seeking higher returns and turning to currency speculation. As many citizens in these economies, including Indonesia and China, have previously witnessed stricter capital controls due to economic downturns, those who can may well be looking at options to keep their wealth globally mobile.

However, even if liquidity can be maintained, confidentiality is becoming more difficult to guarantee in certain parts of the world. The EU, for example, is following the UK’s lead on transparency measures with the approval of a new Anti-Money Laundering Directive in May 2018. This will introduce fully public registers of the beneficial ownership of companies throughout the EU.

But this level of transparency is not finding universal favour: a number of countries in the union recognise the need for regulators to be informed, but not for information to be made public. 

Focus on China

In the past two years, China’s tightening grip on capital outflows has cast a shadow over outbound investment. The introduction of stricter controls has been partly driven by concern over falling foreign reserves, which the government uses to maintain the value of its own currency.

In the second half of 2016, China’s foreign currency reserve assets fell by US$203 billion as the result of exchange rate fluctuations from a raft of overseas acquisitions.

Across 2018 China’s foreign currency reserves fell by US$67 billion, although many of the declines seen in the earlier half of the year were beginning to reverse. If the exchange rate, which on 11 January 2019 stood at 6.76 renminbi to the US dollar, falls further, this decline could be exacerbated, possibly leading to further restrictions on overseas investment by Chinese nationals.

Real estate is now classified as a “sensitive” sector, which means almost all investments into overseas property markets require stringent official approval, especially for large transactions. Despite this, Chinese buyers are still looking at familiar global markets such as London, Sydney, Melbourne and Hong Kong, all of which offer language advantages and immigration possibilities, as well as remaining outside any trade disputes.

The worsening of the trade relationship between China and the US may cause Chinese investors to shift their presence into other key markets. Indeed, there is already evidence for this: in the year to March 2018 there was a 4% decline in US transactions by buyers from mainland China, Hong Kong and Taiwan compared with the previous 12 months, as reported by the National Association of Realtors (NAR) 2018 report.

Controls on capital outflows have had a limited impact on China’s domestic residential market. House prices across China grew by 24% between the beginning of 2016 and the third quarter of 2018. But purchase restrictions applied across mainland Chinese cities are starting to put downward pressure on prices.

Real estate remains a significant wealth preservation asset class. Middle Eastern investors have been longstanding players in global real estate markets, in particular in the UK, Europe and US. Recently, this appetite for global geographic diversification has intensified due to the continued strength of the US dollar. Data from our Attitudes Survey shows that 29% of Middle Eastern UHNWIs increased their exposure to property in 2018.

Focus on India

India is witnessing a substantial rise in personal wealth. The country’s UHNWI population has grown by 30% in the past five years, fuelling an increased appetite for overseas real estate investments. The results of our Attitudes Survey found that 24% of Indian UHNWIs have property investments, excluding first and second homes, outside India, up from 21% the previous year.

Indian buyers are typically attracted by world class education opportunities for their children, new business ventures and stable investment returns. Coveted markets such as London, Melbourne and Dubai draw significant interest. However, other markets, particularly in Cyprus, Malaysia and Sri Lanka are also proving popular.

Despite the restrictions in place under the Liberalised Remittance Scheme (LRS), there is a clear and growing interest from Indian nationals to invest abroad. The LRS permits each resident, as of May 2015, to remit up to US$250,000 overseas per financial year. Since the implementation of the higher limit, Indian residents have sent nearly US$30 billion overseas, with remittances up by 144% between the 2015/16 and 2017/18 financial years.

At present, there is no indication that there will be any change to the LRS limits. The last time the LRS limit was reduced was in 2013, partly driven by the Current Account Deficit (CAD) reaching 4.8% of GDP. Despite the recent depreciation of the Indian rupee, down 9.6% against the US dollar in the year to January 2019, the CAD remains within its “comfort zone”, most recently cited as 2.4%. However, it is worth noting that with a central government election in mid-2019 there could be further economic changes that may impact outward flows.

Focus on the Middle East

The spread of private wealth across the region is centred on the major Gulf States with Saudi Arabia taking the top spot, followed by the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain.

While oil income boosts government revenues, the biggest source of wealth for the private sector have been the construction and financial services sectors. Today these are prominent in the portfolio of Middle Eastern private billionaires, accounting for 23% and 15% respectively.

Given the Gulf Cooperation Council’s (GCC) social context, family businesses are the largest player in trading activities. Knight Frank Middle East’s Wealth Intelligence team has identified 1,300 family businesses across the region. In line with global trends, generational transition remains a challenge: just 7% of billionaire businesses survive to their fourth generation, and only 2% to their fifth. As a result, Middle Eastern families are increasingly turning their attention to generational planning to preserve the passage of wealth.

One consequence of this is that investment is increasingly outward looking. Volatile oil revenues, regulatory changes such as Value Added Tax, geopolitical uncertainty and government investigations remain a key driver of outbound flows.

Real estate remains a significant wealth preservation asset class. Middle Eastern investors have been longstanding players in global real estate markets, in particular in the UK, Europe and US. Recently, this appetite for global geographic diversification has intensified due to the continued strength of the US dollar. Data from our Attitudes Survey shows that 29% of Middle Eastern UHNWIs increased their exposure to property in 2018.

Knight Frank Middle East’s Wealth Intelligence team has mapped the requirements of private wealthy investors in the Middle East.  At the end of 2018, there was an estimated $6.2 billion looking to be invested into commercial property alone, with a significant amount targeting the UK. London remains the top target destination, followed by other European cities like Berlin. This is driven by stability, transparency, liquidity, good returns and cost of debt.

In terms of sectors, office and hospitality remain as preferred segments. However, following global trends and opportunities there is an increasing enthusiasm and consideration for more specialist sectors, such as healthcare, education and the private rented sector.