The Wealth Report 2018

The global perspective on prime property and investment

2018 12th Edition

SENIOR PARTNER ANDGROUP CHAIRMAN Alistair Elliott +44 20 7861 1141 alistair.elliott@knightfrank.com

Global and local insight The Wealth Report provides a platform for Knight Frank to examine and assess the global trends that matter to our clients. Behind this macropicture,ourresearchteamsproduceawiderangeoflocalmarket reportsandsectoranalysistohelpourclientsidentifyandunderstand the residential and investment opportunities available to them. Leading this process is The Wealth Report City Series, the first of which was published in 2017 and focused on Melbourne. This year, the second in the series looks at Dubai, providing a comprehensive overview of economic, property market and lifestyle trends. TheimpactoftheBureauInternationaldesExpositions’decision to award the World Expo 2020 to Dubai, making it the first city in the Middle East to receive this accolade • Current residential market trends – having experienced headwinds in recent years, market performance is moving in a positive direction with annual price growth outstripping regional peers in the 12 months to December 2017 • Dubai’s expanding role as a hub location for Asia, the Middle East and Africa • Quality of life and business rankings – and their impact on property market performance. The Dubai Edition covers: •

GLOBALWEALTHADVISORY Paddy Dring +44 20 7861 1061 paddy.dring@knightfrank.com

TheWealth Report 2018

Rory Penn +44 20 7629 8171 rory.penn@knightfrank.com

COMMISSIONED BY Lord Andrew Hay

Thomas van Straubenzee +44 20 7629 8171 thomas.vanstraubenzee@knightfrank.com COMMERCIAL PROPERTY ENQUIRIES Deborah Watt +44 20 7861 1678 deborah.watt@knightfrank.com GLOBAL PROPERTY SERVICES Lord Andrew Hay Residential +44 20 7861 1071 andrew.hay@knightfrank.com Andrew Sim Capital Markets +44 20 7861 1193 andrew.sim@knightfrank.com William Beardmore-Gray Occupier Services & Commercial Agency +44 20 7861 1308 william.beardmore-gray@knightfrank.com

EDITOR Andrew Shirley

SUB-EDITOR Louise Bell, Sunny Creative

GLOBAL HEADOF RESEARCH Liam Bailey

WRITTEN BY Knight Frank Research

PHOTOGRAPHY Portraits of Lord Andrew Hay and Liam Bailey by John Wright

RESEARCH Gráinne Gilmore Anthony Duggan Kate Everett-Allen William Matthews Sophia King Tom Bill Flora Harley David Ji

This invaluable guide for anyone considering investing in Dubai is available to download at knightfrank.com

Portraits of Niall Ferguson by Tom Barnes and Anders Birger

COVER Radoslav Zilinsky

To find out more about our future plans for The Wealth Report City Series, contact flora.harley@knightfrank.com

ILLUSTRATIONS Stanley Chow SHOUT Stephan Schmitz

CHIEF ECONOMIST James Roberts

DATA VISUALISATIONS Nicholas Rapp

CREATIVEHEAD OF PUBLICATIONS Christopher Agius

NOWAVAILABLE View The Wealth Report and properties from around the world on your device today

Rupert Johnson Valuation & Advisory +44 20 7861 1284 rupert.johnson@knightfrank.com

Definitions

GROUP PUBLICATIONS MANAGER Kate Mowatt HEADOF CORPORATE COMMUNICATIONS Alice Mitchell

UHNWI Ultra-high-net-worth individual – someone with a net worth of over US$30 million excluding their primary residence HNWI High-net-worth individual – someone with a net worth of over US$1 million excluding their primary residence PRIME PROPERTY The most desirable and most expensive property in a given location, generally defined as the top 5% of each market by value. Prime markets often have a significant international bias in terms of buyer profile

Importantnotice TheWealthReport (©KnightFrankLLP2018) isproduced forgeneral interestonly; it isnotdefinitiveand isnot intended togiveadvice. Itmustnotbereliedupon inanyway.Althoughwebelieve thathighstandardshavebeen used inthepreparationof the information,analysisandviewspresented in TheWealthReport ,noresponsibilityor liabilitywhatsoevercanbeacceptedbyKnightFrank forthecontents.Wemakenoexpressor impliedwarranty orguaranteeoftheaccuracyofanyof thecontents.As farasapplicable lawsallow,wedonotacceptresponsibility forerrors, inaccuraciesoromissions,nor for lossordamage thatmayresultdirectlyor indirectly fromrelianceon oruseof itscontents. TheWealthReport doesnotnecessarilyreflect theviewofKnightFrank inanyrespect. Informationmayhavebeenprovidedbyotherswithoutverification.Readersshouldnot takeoromitto takeanyaction asaresultof information in TheWealthReport .Reproductionofthisreport inwholeor inpart isnotpermittedwithoutthepriorwrittenapprovalofKnightFrankLLP. Inpreparing TheWealthReport ,KnightFrankdoesnot imply orestablishanyclient,advisory,financialorprofessionalrelationship.Through TheWealthReport ,neitherKnightFranknoranyotherperson isprovidingadvisory,financialorotherservices. Inparticular,KnightFrankLLP is notauthorisedby theFinancialServicesAuthority toundertakeregulatedactivities (other than limited insurance intermediationactivity inconnectionwithpropertymanagement).KnightFrankLLPalso tradesasKnightFrank. KnightFrankLLP isa limited liabilitypartnershipregistered inEnglandwithregisterednumberOC305934.Ourregisteredoffice is55BakerStreet,London,W1U8AN,whereyoumay lookata listofmembers’names. TheWealth Report iscompiled from informationcontributedbyvarioussources includingKnightFrankLLP, itsdirectUKsubsidiariesandanetworkofseparateand independentoverseasentitiesorpracticesofferingpropertyservices Together thesearegenerallyknownas“theKnightFrankglobalnetwork”.Eachentityorpractice in theKnightFrankglobalnetwork isadistinctandseparate legalentity. Itsownershipandmanagement isdistinct from thatof anyotherentityorpractice,whetheroperatingunderthenameKnightFrankorotherwise. Inanyevent,noentityorpracticeoperatingunderthenameKnightFrank (includingKnightFrankLLP) is liable for theactsoromissions ofanyotherentityorpractice.Nordoes itactasanagent fororhaveanyauthority (whetheractual,apparent, impliedorotherwise) torepresent,bindoroblige inanywayanyotherentityorpracticethatoperatesunderthename KnightFrank (includingKnightFrankLLP).Whereapplicable,references toKnightFrank includetheKnightFrankglobalnetwork.

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THE WEALTH REPORT

Welcome to TheWealth Report

12th edition

I nlastyear’s“Welcome”,Icommentedthattheworldappeared to be at a crossroads. Fast forward 12 months, and we are still waiting for strong global leadership to determine the direction of travel. The range of events creating political turmoil is more diverse than ever: high-stakes verbal sparring between North Korea and the US; the EU’s need to help Spain navigate the Catalonian crisis and balance the growing East-West schism over migration; food security concerns; and ongoing unrest in the Middle East, to mention but a few. Set against this backdrop, the health of the global economy surprised many in 2017 – and is likely to continue to provide more good news this year. Yet despite positive economic fundamentals underpinning many of our markets, reading through this edition of The Wealth Report , many articles – in particular our interview with eminent historian Niall Ferguson – confirm that it is the political risks that have the potential to cause upset, making the future ever harder to predict. As an adviser to some of the world’s wealthiest people, life at Knight Frank is fast-paced and exceptionally interesting. Providing the best advice during constantly changing times is challenging. But by employing the best people, continuously enhancing our research capabilities and extending our global network, we aim to react quickly to events, ensuring our advice enables our clients to constantly recalibrate their investment strategies. The desire to “take back control” is an increasingly important part of these strategies. Many of you are taking a more hands-on role when it comes to your investments, employing in part your own expertise, forming syndicates and building relationships with carefully selected trusted advisers who can offer bespoke advice on specific sectors. The growing influence of family offices as real- estate investors, described on page 53, is a clear example of this. As ever, Knight Frank is listening and evolving tomeet the needs of our clients. Our Family Office Forumbrings like-minded private investors together, while a dedicated 26-strong high-net-worth focused team provides our most global clients with a single point of contact for all their property needs in the keymarkets worldwide. I am confident that this year’s edition of The Wealth Report will both guide and reassure you. In addition to exploring themovement of wealth around the world and the fluctuations of the world’s luxury residential propertymarkets, this year’s report offers some fascinating insights into luxury spending trends, be it investing in a record-breaking piece of art or, as in the case of one particular client, your own sports team. It is likely thatmany of the articleswill prompt further questions. Please do get in touch if you would like further information from our research team or guidance on your property portfolio. We are here to help you, and look forward to working with you in 2018.

LORD ANDREW HAY GLOBAL HEAD OF RESIDENTIAL

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THE WEALTH REPORT

Contents

12. Global wealth

61.

Luxury spending

20/20 vision An Indian billionaire IPL owner shares his love of cricket page 62 Face-off The results of the Knight Frank Luxury Investment Index page 66 Home is where the art is The evolving links between art and property page 70

New order The latest research into the global population of wealthy individuals page 14

Follow the money A unique analysis of global wealth flows page 20 Urban power

The Knight Frank City Wealth Index page 26 Passing the bucks Why is succession such a big issue for the wealthy? page 30 Chain reaction Will Blockchain revolutionise property markets? page 32

33.

Property A fine balance The latest results of the Knight Frank Prime International Residential Index page 34 Watch this place The challenges and opportunities facing residential markets in 2018 page 40 Peak performers Prime residential markets set to outperform page 42 Firm foundations Private investors are driving investment property markets and global mega-deals page 48 From strength to strength Family offices are broadening their property portfolios page 53 Economic outlook The key themes set to shape property investment markets in 2018 and beyond page 56 Leading lights Top locations and sectors for private property investors to consider page 58

04.

06. The big interview Historian Niall Ferguson talks exclusively to The Wealth Report about the issues facing the world and its wealth creators

77.

84.

From the editor Andrew Shirley gives a global perspective on the key trends from our 2018 edition

Final word The death of cheap money will help shape prime property performance, argues Liam Bailey

Databank Global wealth distribution and The Wealth Report Attitudes Survey 2018 results in detail

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THE WEALTH REPORT

Editor’s note

Around the world in 80 pages The Wealth Report has always been a truly global document – and this year’s issue is no exception. Editor Andrew Shirley highlights the locations that exemplify some of the key trends and most interesting articles from our 2018 edition

4

7

3

2

6

1

8

5

1. SILICON VALLEY

2. NEWYORK

3. LONDON

4. AMSTERDAM

5. CAPE TOWN

6. MOHALI

7. GUANGZHOU

8. AUSTRALIA

The hub of the social networks that are changing the world, for better or worse. Professor Niall Ferguson, now a senior fellow at Stanford University in the heart of the action, explains why SiliconValley’stechtitanscoulddowith a history lesson. Page 6

The Big Apple scores big in our annual survey of the cities that matter to the world’s wealthiest people, taking top spot in the rankings right across the board. Nine other US cities join New York in the top 20, alongwithfive urban hubs in Asia. Page 28

Refusing tobe bowedbyBrexit, London is one of the biggest beneficiaries of the shifting flows of global capital. Our unique new analysis of data from the Bank for International Settlements showswhere themoney is coming from – and where it’s going to. Page 20

Europe has been the recent global laggardintermsofprimepropertyprice growth. But in 2017 Frankfurt, Paris, Munich and Madrid all saw double- digit price rises. Amsterdam, however, led the way with a 15% annual surge in average values. Page 34

Art, wealth and property have been bedfellows for millennia. Now, that relationship is creating exciting new synergies in the 21st century, as demonstrated in stunning style by Cape Town’s Zeitz Museum of Contemporary Art Africa. Page 70

Owning your own team is the ultimate investment of passion for sports-mad billionaires. The Wealth Report talks to one who saw early on the potential returnsfromtheIndianPremierLeague, the cricket tournament redefining this most traditional of games. Page 62

Governmentcoolingmeasuresmayhave dampened prime property markets in Shanghai and Beijing, but Guangzhou powers on. Sitting at the top of our benchmark PIRI 100 index, prices in the Chinese mainland’s third largest city rose by over 27% in 2017. Page 34

Globaldemographicsandconsumption trends make farmland an investment sector to watch. On the doorstep of the fastest-growingmiddle class inhistory, Australiaofferstemptingopportunities for those looking to invest in the most tangible asset of all. Page 58

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THE WEALTH REPORT

The big interview

Reformation 2.0

Niall Ferguson, one of the world’s most influential and controversial historians, talks exclusively to The Wealth Report’s editor Andrew Shirley about the big issues facing the world and its wealth creators

N iall Ferguson is in high spirits when we meet at the Hoover Institution at Stanford University, California, where he is a senior fellow. He’s just become a father for the fifth time, his latest book has been getting good reviews – and I’mprobably one of the last things standing between him and the Christmas holidays. But over the next hour and a half, it becomes clear that Professor Ferguson is deeply concerned about the world we live in and what lies in store for future generations. Unsustainable levels of government debt, the implications of an increasingly connected world, religious fundamentalism and rising inequality are just some of the issues preying on his mind. My first question is a very simple one, suggested by my ten-year-old son when I proudly told him I was interviewing somebody ranked as one of the world’s 100 most influential people by Time magazine: “Dad, just ask the professor why everybody in the world can’t live peacefully together.” Initially it seemed like too naive a query to put to such an august figure. But reading Professor Ferguson’s new book The Square and the Tower , which examines the battle for power between traditional hierarchies and emerging social networks, I’m struck by the realisation that some of the early proponents of the internet did, in fact, believe that they had found the key to creating one big happy global family.

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THE WEALTH REPORT

The big interview

goods, and imprison the corrupt financial elite, everything would be better.’ The populists of the left say, ‘Just tax the corrupt financial elite.’ So the policy programmes are quite different, and thatmeans that populismcan lookmore or less alarming, depending onwhere you sit. Most people who write for the liberal media aremuchmore scaredof the populismof the right andoften confuse it with fascism, even though it’s actually quite different. If you are a member of the corrupt financial elite, you’re probably more concerned about the populism of the left, because it’s much more single-mindedly focused on you.” The backlash against the backlash But whether left- or right-leaning, populist movements are often driven by nostalgia. And that means, ultimately, they are almost always bound to disappoint. “There is inevitably an element of disillusionment in any populist backlash,” says Professor Ferguson. “You can never really get what you want with populism. More or less anything that’s promised is going to fall short. If you restricted immigration to the US completely, if you imposed punitive tariffs onChinese imports, the effect on the ordinaryAmericanhousehold would be to make them worse, not better, off. “In the same way, I think we’ve just more or less calculated that the cost of Brexit to the UK so far, per week, is roughly the same amount that the Leave campaign said Brexit wouldmake available to spend on the National Health Service.” Professor Ferguson says the populist wave that swept the US appears to be losing impetus, partly due to concerns over tax reform legislation. “It adds more than US$1 trillion to the deficit over ten years, which is not something that I can enthusiastically condone, and it’s not popular. So from a political point of view it seems to me the backlash is already gatheringmomentum. It’s the backlash against the backlash if you like; the backlash against populism.” The professor is also sceptical about Brexit, which he likens to an extremely messy divorce. “I’m afraid that the outcome is bound to disappoint in one way or another. Either Britain is going to end up being de facto subject to European regulations, and perhaps even to the free movement of people, or it’s going to have to pay quite a high price outside the EU. “It doesn’t seem to me immediately obvious that Britain can do a bunch of better deals with other countries than the deals that it has with the EU. It’s highly unlikely that, in a short space of time, Britain can compensate for the hit of leaving the single market. “I understand why Remain lost, but don’t be naive about what this divorce is going to cost, how long it’s going to take, and where you’ll end up. One thing I’ve learned from my own experience is that it’s very easy to blame all your problems on the spouse that you’re divorcing, but there comes a moment when you realise that actually some of the problems are down to you. The lowproductivity of the Britishworkforce is nothing to dowith Brussels whatsoever.” The arithmetic of debt It seems an almost impossible time to be a politician, I suggest to Professor Ferguson. In order to win power you need to put forward populist policies, but in order to actually deliver themyou’d need to raise taxes to politically suicidal levels. Is there a way that mature governments can break the circle so that giant leaps into the dark, like voting for Brexit or overtly populist politicians, are no longer seen as the only viable option?

bluntly. “The same thing also happened 500 years ago in the Reformation. Martin Luther thought that if everybody could read the Bible and see his sermons thanks to the wonder of the printing press, then there would be a priesthood of all believers, as foretold in the gospels. “Instead, what actually resultedwas 130 years of religious strife, for the simple reason that not everybody agreed with Luther. In fact, a greatmany people violently dissented and that ultimately led to the Counter-Reformation. I think what we are seeing today is another version of that same story. The idea behind The Square and the Tower is a very simple one. It is that people in SiliconValley knowalmost no history, and peoplewhowrite history know almost nothing about network science.” It’s this that drew Professor Ferguson to Stanford in the heart of Silicon Valley, home to Google, Facebook, Uber and many of the other tech companies that have upended our daily lives. “The history of our times, to some extent, is being written here,” he says. The revolt against the elites The more you consider the polarisation of opinions that Professor Ferguson describes in his book, the more it becomes apparent just how much of today’s news agenda is being driven by the phenomenon. The rise of populist movements around the world, from Brexit to Trump to political events in the Middle East, has been turbo-charged by social networks. Surging populism is something that clearly worries the wealthy. The results of The Wealth Report Attitudes Survey this year reveal that almost 50%of respondents believe it could impact their clients’ ability to create and preserve wealth. But what exactly is populism, and are the wealthy right to be concerned? On his Fox News show I hear Steve Hilton, once an adviser to former UK Prime Minister David Cameron, describe it in almost folksy terms: it’s the common man taking back power, embracing old-fashioned family values. To others, like Princeton’s Professor Jan-WernerMüller, it’s almost the opposite: anti-plurality, anti-debate, often dangerous and largely based on a false premise. “ I t h i n k b o t h o f

You can never really get what you want with populism. Anything that’s promised is going to fall short

these views are in fact consistent with each other. It’s just that one is the view of somebody sympathetictopopulism, while the other comes from somebody hostile to it,” reckons Professor Ferguson. “Populism is essentially a revolt against elites. It comes in two flavours though – thepopulismoftheright, and the populism of the left – and this can be a source of confusion.

“When the internet came into being, and particularly in the 1990s when it was in its first great investment boom, there was a story that was told by many people. The story was that, once everybodycouldemailoneanotherandsharewebpages,everything would be awesome,” explains Professor Ferguson. “We would all beabletoexchangeviewsandnews,cometounderstandoneanother better, and ultimately forma kind of global community or republic of cyber-space. It was a tremendously attractive idea, this notion that greater knowledge and greater connection would lead to greater harmony.” So, what went wrong? “Greater connectedness, far from producing a unified global community, tends to result in greater polarisation because of a phenomenon that the network science people call homophily. We are inclined to be attracted by people like ourselves – birds of a feather flock together – andwhen you create a large social network, it becomes easier for people to cluster into like-minded subgroups.” What makes the “everything’s going to be awesome” internet cheerleaders sound even more naive is that this phenomenon is far frombeing unique to the 20th and 21st centuries. “The bad news is that history is against this hypothesis,” says Professor Ferguson

“The populists of the right tend to say, ‘Your problems are all due to immigration, free trade and a corrupt financial elite.’ The populists of the left tend to say, ‘Your problems are all the fault of a corrupt financial elite.’ The populists of the right say, ‘If you could restrict immigration and impose tariffs on imported

Top of the pops Populism swept Austrian Chancellor Sebastian Kurz into power, but it has been a thorn in the side for UK Prime Minister Theresa May

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THE WEALTH REPORT

The big interview

Federal Reserve, to counter what was potentially a catastrophic chain reaction, which they did first by cutting interest rates to zero, and then by engaging in quantitative easing. “One of the direct consequences was that all kinds of financial assets recovered in price, andwe didn’t go into a depression. People who held on to their stocks as well as their bonds, not to mention their real estate, weremadewhole remarkably quickly. It was almost like a bad dream, and now it’s over andwe’re all cheerful again. It’s almost as if amnesia is beginning to set in. “That’s the verymoment at which I feel obliged to ask, ‘So, what’s the next crisis going to look like?’ Nobody can be exactly sure, but I think there are a few reasons to watch out. One is the tightening of monetary policy we’re already seeing, starting with the Fed and the Bank of England. That is usually a sign that conditions are going to become less friendly.” The China question Another reason to be cautious is rising debt. But this time around, it’s a very different kind of debt to the US sub-prime mortgages that broke some of the world’s leading banks last time. Now, it’s all about China. “That’s definitely the big question,” says Professor Ferguson. “Sustained growth in China was the other reason that we didn’t have a re-run of the Great Depression. If China hadn’t focused so much on credit creation, I thinkwe would have had amuch tougher time globally. It was the stimulus package that worked.” However, the flipside of China’s great crisis-fighting policies is a very high level of debt. “With the emergence in China of some of the pathologies that we recognised in theWest ten years ago, like shadow banking and real estate bubbles, you have to ask yourself, as the IMF did just the other day: are China’s big banks sufficiently well capitalised to cope if there was suddenly a downturn in the real estate market? “So, China is definitely the place towatch. Of course, economists have predicted nine out of the last zero Chinese financial collapses. I’mnot about to add to the list of failedpredictions, but I do think it’s muchmore likely than the US to be the epicentre of the next crisis.” I push him for a timeline. “I’m not giving you a date to liquidate your portfolio,” he responds, “but I do think that we’re entering a different era. The post-crisis period is over. What we’removing into now, perhaps, is a new pre-crisis period. “I’m not saying there’s going to be a recession in January, February, or even December. We could sail through 2018 without any policy reverse, but I think the probability is rising that therewill be a fundamental change in financial conditions, and the higher political risk that I think we’re seeing more or less everywhere is bound to weigh on assets sooner or later.” As to how bad the impending crisis might be, again Professor Ferguson won’t be drawn. “It’s impossible to say anything about the next economic or financial crisis, except that it won’t be like the last one. The more regulation you dream up to avoid the last crisis happening again, the more certain you can be that the next crisis will be quite different.” Amatter of opinion Despite not wanting to predict the future – “I’m an historian, I don’t have a licence for that” – Professor Ferguson certainly doesn’t just dwell in the past. Throughout the course of our conversation

interests of the generations, but that must involve some elements of increased taxation, and some elements of welfare reform. Those are two difficult things.” It seems a bleak outlook and raises the question, where do countries like the US and UK go next if democracy can’t solve their problems? “I think it’s extraordinarily difficult, evenwith the best will in the world, to get this kind of thing done in democratic systems,” Professor Ferguson admits.

“It’s very, very hard to get out from under the nasty, fiscal arithmetic of debt,” he admits. “Most developed economies without large natural resources, and that includes most EU states and the US, have really substantial public debts, and often even more substantial unfunded liabilities that don’t appear on any national balance sheet. “This is an extraordinarily difficult question in political economy, because it’s about generational imbalances. Right

But that’s not to say he’s given up on democracy. “Don’t get me wrong, I still think democracy is the bestoption.Othersystemsmaysolvesomeproblems easily, but theywill find the bigger problems harder to solve. Expecting the middle class to accept life withoutpropertyrights,andwithoutrepresentation, is not realistic.”

now, the dice are loaded in favour of the baby- boomers, people like me who were born in the two decades after the end of World War Two, and they’re loaded against newborns, children and the unborn. This is a really striking pathology ofmoderntimes,thisbreachofcontractbetweenthe generations. It’s veryhard tofix because the unborn and children don’t get to vote, whereas the elderly now tend to stick around long after retirement age, and they vote in rather large numbers.” Warming to his theme, Professor Ferguson goes even further. “I think this is the central problem of our time. In 2001 I published a book called The CashNexus , inwhich I predicted that the politics of

he is highly critical of the way certain recent political crises have been dealt with. He is particularly scathing about Barack Obama’s strategy in theMiddle East, theWest’s reaction to Islamic terrorism and Angela Merkel’s handling of the EU immigration crisis. “I haven’t ever set out to be a contrarian for its own sake,” he stresses. “But from a relatively early age, I can remember feeling a strong urge to disagreewithwhat seemed tome to bewrong-headed conventional views. So, I’ve tended to readmyway through the past, going from one question to another, itching to show that what you the reader think, is wrong.” My final question for him is what kind of world he thinks his new son will grow up in, if it’s not one where everybody lives in peace and harmony. The answer is not reassuring. “It will still be a frustrating world to be young in for our sons. All these oldies hanging on to their jobs for way too long and blocking upwardmobility. I think it will be a very unequal world, where the returnsoninnovationhavegonetoatinyproportionofhumanity.”In this instance, I verymuchhope it’s Professor Fergusonwho iswrong.

This is a striking pathology of modern times, this breach of contract between the generations

Troubled times Talking of big problems, Professor Ferguson, who accurately predicted the 2008 global financial crisis, believes the world is not too far away from another recession. Why andwhen, I ask nervously? Intermsofwhy,thecounterintuitiveanswer,hesays, is partly because the world coped much better than he expected with the previous crisis. “I was pretty much on the ball as to what would happen and how big it would be. So, pat on the back, well done Niall. But what happened next wasmore remarkable, and I didn’t read that sowell. I underestimated the ability of the central banks, particularly the

the future would be about generational conflict, not class conflict. Well, we’re here now. Butmost of us don’t really have the vocabulary to adapt, because we’re still used to thinking in terms of class, or percentiles: the 1%against everybody else. That’s all anachronistic. The real issue now is, who pays? Is it going to be grandad, dad or the kid? The solution is clearly to try to strike a balance between the

Bird’s eye view Growth in Chinese cities like Shenzhen helped save the world from the global financial crisis

Looking ahead Niall Ferguson predicts an uncertain future for the next generation

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Global wealth

The big issues shaping the decisions of the wealthy

New order The latest research into the global population of wealthy individuals – page 14

Urban power The Knight Frank City Wealth Index – page 26

Follow the money A unique analysis of global wealth flows – page 20

Chain reaction Will Blockchain revolutionise property markets? – page 32

THE WEALTH REPORT

Wealth distribution Wealth distribution

INDIVIDUALS WORTH OVER US$50M IN 2017 GLOBAL WEALTH

WEALTH POPULATIONS 2012 TO 2022

New order

GROWTH OF GLOBAL US$5M+ POPULATION

3,617,550

-5%

0

10

20

30%

2,535,480

Super-rich populations are rising, but Europe is slipping down the ranks of the world’s wealthiest regions, according to new numbers compiled for The Wealth Report. Gráinne Gilmore investigates

2,108,530

ANNUAL CHANGE Q4 2016 TO Q4 2017

2012

2017

2022

PROJECTION

T he theme of the 2018World Economic Forum inDavos was “Creating a Shared Future in a FracturedWorld”. While the world has faced an array of stiff economic and political challenges since global business leaders and policymakers first met in Switzerland back in 1971, the theme reflected a recognition that the threats faced by individuals, businesses and states are more widespread and diverse than ever. But while delegates at the forumabsorbed the cheery news about the re-emergence of “geostrategic fissures” onmultiple fronts, the economicpicturelookedtobebrightening.Indeed,investmentbank Goldman Sachs chose to title its global economic outlook for 2018 As Good As It Gets . Longer term, though, the picture is less clear, with the IMF and other commentators, including this report’s keynote interviewee, the financial historian Niall Ferguson, predicting headwinds for global economic growth in the not too distant future. So what does a potentially time-limited economic upswing, coupled with geopolitical uncertainty, mean for ultra-wealthy populations around the world? New data prepared exclusively for The Wealth Report by wealth data specialist Wealth-X shows that the number of ultra-wealthy people (those with net assets of US$50 million or more) rose by 10% in 2017. This is in line with the results of TheWealth Report Attitudes Survey, in which 72% of respondents said that their clients’ wealth had increased during the year. This took the the global population to 129,730, with a total worth of US$26.4 trillion. The Goldilocks economy According to Vincent White, Managing Director at the Wealth-X Institute, this is an auspicious time for wealth creation. “We have been experiencing ‘Goldilocks’ economic conditions: not too hot, and not too cold. These make it easier to do business, provide a good environment to raise capital and, above all, encourage entrepreneurialism – the key to wealth creation.” For this edition of The Wealth Report , the focus is on those with US$50 million or more in net assets, as well as demi-billionaires (over US$500 million) and multi-millionaires (over US$5 million). That 10% rise in the ultra-wealthy population marks a notably more rapid rate of growth than in the previous five years, where there was a cumulative 18% increase – indeed, The Wealth Report reported that ultra-wealthy populations actually fell in 2015. It mirrors the growing momentum of the global economy since the

MULTI-MILLIONAIRE (US$5M+)

20%

2012–2017 2017–2022

43%

ULTRA-WEALTHY (US$50M+)

18%

2012–2017 2017–2022

40%

ASIA 35,880

DEMI-BILLIONAIRE (US$500M+)

14%

2012–2017 2017–2022

39%

REGIONAL CHANGE IN US$50M+ POPULATIONS

59,920

GLOBAL US$50M+ POPULATION 129,730

44,000

33,520

NORTH AMERICA

EUROPE 35,180

47,110

NORTH AMERICA 44,000

35,180

32,090

EUROPE

55,740

35,880

26,250

ASIA

MIDDLE EAST 4,880

4,740

6,040

LATIN AMERICA & CARIBBEAN 5,380

4,220

5,470

RUSSIA & CIS 4,530

2016–2017 REGIONAL CHANGE

2,870

3,590

3%

MIDDLE EAST

AUSTRALASIA 1,900

5%

NORTH AMERICA

1,650

2,230

7%

AUSTRALASIA AFRICA

9%

AFRICA 1,300

10%

EUROPE

1,190

1,560

15%

ASIA

20%

LATIN AMERICA RUSSIA & CIS

SOURCE: ALL DATA SUPPLIED BY WEALTH-X

2012

2017

2022

26%

PROJECTION

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THE WEALTH REPORT

Wealth distribution

start of 2017 – but the number of wealthy individuals is only one part of the methodology used by Wealth-X. In addition toGDP growth, the performance of stockmarkets and other investments is taken into account, as are wealth distribution trends within countries – calculated usingWealth-X’s proprietary models. Currency also plays a significant role. The wealth data is shown in US dollars, and, as a result, the movement of local currencies against the dollar also has an impact. “Many currencies gained strength against theUS dollar last year, which has resulted in a net increase in our estimates,” confirms Mr White. “However, the relationship is not linear. There is an interplay between this and other factors affecting wealth growth.” Regional variations When it comes to assessing how ultra-wealthy populations have faredbetween2012 and 2017, the picture ismixed.While thenumber of people with US$50 million or more in net assets rose in North America (+31%), Asia (+37%) and Europe (+10%), there were falls in the remaining five regions, most notably in Latin America and the Caribbean (-22%) and Russia and CIS (-37%). Some of these trends reversed in 2017. Russia and CIS bounced back by 26%, coinciding with Russia’s exit from recession at the start of the year. However, the number of peoplewithUS$50million or more in net assets is still 37% lower than at the start of 2012. At 2,870, the number of ultra-wealthy individuals living in Russia and CIS accounts for around 2% of the global total. North America remains the world’s largest wealth region. Some 34% of the world’s ultra-wealthy are based there, and their ranks rose by a further 5% last year, taking the total to 44,000. Asia sets the pace Europe,however,failedtofendoffastrongAsianchallenge,narrowly losing its second place spot despite a 10% rise in the number of people with US$50million or more in net assets that took the total population to 35,180. A 15% rise in Asia’s ultra-wealthy cadre took its population to 35,880. In China, the ultra-wealthy population will more than double in the next five years, according to Wealth-X. There will also be strong growth in Japan (+51%), India (+71%), Indonesia (+66%) and Malaysia (+65%). Overall, the outlook for the Asia region is “highly optimistic”, Mr White says. Agathe L’Homme, Asian Analyst at the Economist Intelligence Unit, adds: “We have revised up our economic outlook for the region owing to a rosier Chinese growth forecast in the short term. Steady demand fromfinal consumermarkets and rising commodity prices will support exporting countries in the region, while expectations of a very gradual monetary tightening will underpin growth overall.” Europe’s 10% growth in its ultra-wealthy population last year may seem counterintuitive given the political challenges facing the region. Yet many European countries saw amarked upswing in economic performance last year, with the euro zone outperforming the UK and US economies in terms of GDP growth. The European Central Bank (ECB) also held off tighteningmonetary policy, unlike central banks in the UK, Canada and the US. However, as James Roberts, Knight Frank’s Chief Economist, explains on page 56, the ECB is set to taper its quantitative easing programme this year. Latin America and the Caribbean also saw a bounceback in ultra-wealthypopulationsin2017,witha20%riseafterthe22%decline

POSITIVE THINKING Proportion of wealth advisers who say that their clients’ wealth increased in 2017 and will do so in 2018

INCREASE OR STABLE

DECREASE

100%

88% 91% 94%

87% NORTH AMERICA

80% ASIA

76% AFRICA

74%

69% RUSSIA & CIS

62% AUSTRALASIA

61%

57% MIDDLE EAST 58% EUROPE

57% 54%

48% LATIN AMERICA

GLOBAL AVERAGE

40%

2017

2018

Sugar coated Wealth populations rose in Latin American countries such as Brazil last year

SOURCE: THE WEALTH REPORT ATTITUDES SURVEY 2018, KNIGHT FRANK

seen since 2012. The total number of ultra-wealthy individuals in the region (4,220) is still lower than in 2012 (5,380), but the figure is expected to grow by 30% over the next five years. Brazil, the biggest wealth hub in the region, also saw strong growth last year. Ian Bremmer, Head of Eurasia Group, a leading political risk consultancy,told TheWealthReport :“It’slargelyaneconomicrecovery story. The stock and bondmarkets have performed extraordinarily well this past year. While the ultra-wealthy took a hit in 2016, there was a clear rebound in 2017. Note that this was happening at the same time as the Brazilian real was going through an important devaluation. So in dollars, there was a real improvement.” In the US, new tax policies aimed at trying to encourage more corporates tomovemoney onshoremay have ramifications for the whole economy and, in turn, for ultra-wealthy populations. In late 2017, President Donald Trump announced a raft of tax changes, including an ultra-low 15.5% tax rate for companies bringing their money onshore. He also cut corporation tax to 21%, aswell as cutting some income tax rates and boosting family allowances. Under current economic forecasts, the US is expected to see a 38% rise in its ultra-wealthy population over the next five years. However, the change to corporation tax could have an impact in the

SLEEPLESS NIGHTS Proportion of wealth advisers who say that each issue will have a negative impact on their clients

56%

TERRORISM

POPULISM

49%

47%

CYBERCRIME

NORTH KOREA

40%

34%

BREXIT

TRANSPARENCY

31%

31%

TRUMP PRESIDENCY

Reach for the sky Malaysia’s forecast five-year wealth population growth is one of the world’s highest

SOURCE: THE WEALTH REPORT ATTITUDES SURVEY 2018, KNIGHT FRANK

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THE WEALTH REPORT

Wealth distribution

Breaking the cycle In failing states the normal models of wealth creation fall apart. Andrew Shirley asks former Afghan politician Seema Ghani why

A fghanistan, unsurprisingly, doesn’t feature in our study of global wealth populations. No reliable figures exist as to the number of HNWIs living in the country, but one thing is certain: although there is plenty of money circulating among an elite group of wealthy individuals and businesses, very little of it is trickling down to the rest of society, especially

Aga Khan Foundation are shifting some power back into the hands of people at the bottom of the wealth creationladderbyhelpingtheruralpoortosetuptheir ownmicroenterprises.Notonlydotheseprogrammes help offset the country’s entrepreneur drain, they provide Afghanistan’s educated and unemployed young people with a productive, often life-changing outlet.And,becausetheytargetpoorAfghansdirectly, the short-termism that mars Afghanistan’s politics is sidestepped completely.

jobs and so poverty levels remain high, especially outside Kabul.” Another problem is the fact that very little investment flows out of the capital to the rest of the country. “All the government contracts are awarded to businesses based in Kabul. And even when they are working on projects in the provinces they bring labour and sub-contractors fromKabul, too,” saysMs Ghani. Indeed,Ms Ghani, whowas deputyminister of

those living outside the capital Kabul. Seema Ghani, a former deputy government minister turned anti- corruptioncampaignerandNGOleader, says that there are a number of reasons whythenormalmodelofwealthcreation, whereby the poor gradually become better off, even in countries with high levels of wealth inequality, appears to be failing in Afghanistan. “What is happening is that we are becoming a nation of importers. Those withmoney invest in importing things fromothercountries.Moneyisnotbeing used to produce anything here that wouldgenerateemployment.Evenbasic agricultural productivity is declining.” A culture of short-termism and corruption is to blame, says Ms Ghani, who has calculated that private businesses pay only one third of the tax that they owe. “Despite the billions of dollars of aid that the government has received over the past 16 years, and which now accounts for about half of our national budget, it hasn’t managed to tackle security or create the

“It’s not easy because decades of aid dependency have made even the poorest people very demotivated,” says Ms Ghani. “But once we’ve convinced people to change theirmindset and they realise that we have zero tolerance for corruption of any kind, the results are very rewarding and we find that other people start asking for help as well.” Not that Afghanistan’s micro entrepreneurs have it easy. Those who successfully set up small businesses – for example, poultry production – often have to compete with cheap imports, while poor infrastructure makes it difficult to access other marketplaces. “We are constantly having to adapt and think of new ideas and approaches – but one benefit of smaller NGOs is that they can be much more reactive,” says Ms Ghani. “It’s not easy, but this year we will have created employment for about 11,000 people, so it can be done.” It can be done – and it must be done, she adds. The NGOs are also competing

Leading the way The seven co-chairs at this year’s World Economic Forum

global footprint, with houses in countries around the world,” says Wealth-X’s Mr White. “The switch from using hotels to investing in property is triggered by manyfactors,suchasnationality,ageandtheindustry inwhich they are involved. Culture and lifestyle also play a very significant part.” Theglobalmobilityoftheultra-wealthyisnoticeable in such countries as Monaco. There are around 50 people worth over US$50 million with a primary residence in the principality, according to the Wealth-X model. However, once the definition of residenceisextendedtoallthosewithahomeorpresence inthecountry,thisnumberrisesto542,makingMonaco one of the most densely populated countries in the worldintermsofultra-wealthypeopleasaproportionof the total population. Beyond 2018 Looking ahead, there are likely to be an increasing number of economic and geopolitical headwinds, not leastmonetary tightening across the board. However, ultra-wealthypopulations are expected to continue to grow in themediumterm. “Evenwhen conditions are negative, we have traditionally seenmore resilience among ultra-wealthy populations,” Mr White says. However, he also adds a note of caution, echoing some of the themes discussed at Davos. “There are societal changes taking place over the longer term – the reaction to wealth inequality is a pressure that shouldn’t be ignored. Theremaywell be a point where the growth in ultra-wealthy populations doesn’t automatically continue on its current trajectory.”

future, especially if it encourages more investment across the US. “In terms of fiscal policy, changes in corporation tax and capital gains tax have the largest impact on ultra-wealthy populations, although it can take some time for the changes to be felt,” explains Winston Chesterfield,DirectorofCustomResearchatWealth-X. Itfollows,then,thatachangeinpoliticalleadership can also affect ultra-wealthy populations. One such change recently in South Africa may well have an influence, according to Dr Bremmer. “Investor and consumer confidencewill rise in the wake of the election of Cyril Ramaphosa as head of theANC,”Dr Bremmer says. “Wealthy SouthAfricans are likely to continue moving money abroad and acquiring dual citizenship, although they are now also more likely to stay resident in the country since they are supportive of the new ANC leader.” South Africa is forecast to see a 20% uplift in its ultra-wealthy population over the next five years following a 14% rise in 2017. So, where do you live? DrBremmer’scommentsraiseasalientquestionabout where some ultra-wealthy people are actually based. The methodology used by Wealth-X looks at residences and/or the locationof business operations. While the majority of ultra-wealthy people will have their primary residences in the country from which theirwealthisderived,asignificantnumberareglobally mobile. “There is no particular financial wealth band thatdictateswhether ultra-wealthy peoplewill have a

Changes in corporation tax and capital gains tax have the largest impact on ultra-wealthy populations

withterroristorganisationssuchastheTaliban,which pays its recruits up to US$600 a month. “If we don’t succeed it’s not just this country that will suffer – the flow of refugees heading for the rest of the world will continue. It’s muchmore cost effective to tackle this problemon the ground thanwaiting for themto arrive in the Western world.” Seema Ghani is chair of the NGO Hand in Hand Afghanistan and co-founder of the People’s Movement Against Corruption

finance in 2004 and deputyminister of labour affairs in 2011, resigned both positions because she couldn’t livewith the systemof patronage and short-termism. Breaking this vicious circle, when politicians have such a short-termview and are unwilling to embrace thevisionoftheyoungergeneration,seemsadaunting prospect. But for all that, she remains hopeful that the right kinds of interventions can make a difference. Working mainly in the northern provinces of the country, initiatives funded by NGOs such as Hand in Hand Afghanistan, which Ms Ghani chairs, and the

infrastructure and pool of qualified labour needed to encourage private investors. It is cheaper and safer to import things, or invest elsewhere. Entrepreneurs do exist, but many have moved to Dubai or are creating businesses in places like Malaysia.” A lack of well-educated young people with new ideas to help take the country forward isn’t part of the problem, Ms Ghani points out. “Lots of aidmoney has been spent on education and almost six million childrennowattendschool,asignificantachievement. But when they graduate there simply aren’t enough

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THE WEALTH REPORT

Wealth migration

ANNUAL CHANGE IN TOTAL NON-BANK DEPOSITS BY LOCATION OF ORIGIN, TO Q2 2017 (US$BN)* MONEY ON THE MOVE

Follow themoney

LOCATION OF MONEY CHANGE IN NON-BANK DEPOSITS FROM Q2 IN THE YEAR SHOWN TO Q2 2017

DESTINATION

INCREASE

DECREASE

ORIGIN

HELD OUTSIDE OWN COUNTRY

HELD INSIDE EACH REGION

Over the next six pages, Liam Bailey and Flora Harley track the movement of wealth around the world, starting with a unique analysis of global money flows

SIZE OF CHANGE (US$bn)

UK

40 50

1,559

30

SOUTH KOREA

’15 ’14 ’16

’15 ’14 ’16

SINCE: 2012 ’13

2012 ’13

US

10 5

11

1,320

US$500bn NORTH AMERICA

ISLE OF MAN

FRANCE

25

400

665

300

HONG KONG, CHINA

200

O ne of the critical issues we consider each year in The Wealth Report is where money is coming from – and where it is going to. It is this issue that ultimately helps to drive market performance in the 100 luxury residential markets we consider in our Prime International Residential Index (PIRI) on page 34 and the commercial propertymarkets we examine from page 48. Helpfully, figures just released enable us to give an intriguing snapshot of global monetary flows (see opposite). In 2016, the Bank for International Settlements (BIS) started to release data provided by 29reportinglocationsontheaggregatelevelofforeign depositsby“non-banks”intheirfinancialinstitutions. Of the reporting locations, 27 also analyse deposits on a location-by-location basis. Non-banks include individual, corporate and government deposits. This provides a unique perspective on the movement of money around the globe, helping to confirm the direction of travel of wealth and investment flows. Understanding wealth flows Chinese funds deposited in reporting locations rose by US$172 billion, a staggering 721%, in the three years to June 2017. Over the same period, deposits held by Russian non-banks grew by US$6 billion, up 21%. The outbound flow of funds from China in particular, but also from other locations including Russia, has been a key trend affecting global asset markets over recent years. Despite official attempts to rein in these flows, the BIS data confirms that the trend looks likely to continue. One subject we discuss at length later in this article is the growth of legislation aimed at improving financial and tax transparency globally. The OECD- inspired Common Reporting Standard (CRS) leads the way in this area. Anecdotally, some investors appear keen to remain outside the scope of the regulations. The US and Taiwan are in the minority of major economies that have not committed to the CRS, and over the three years to June 2017, ahead of its implementation,

100

380

GUERNSEY

27

0

UAE

BRAZIL

THAILAND

EUROPE US$200bn

MEXICO

SWITZERLAND

SWITZERLAND

100

MACAU, CHINA

CHINA

337

31

0

CAYMAN ISLANDS

-100

-200

UK

AUSTRALIA

-300

CANADA

-400

173

40

HONG KONG, CHINA

JERSEY

US$400bn ASIA

DENMARK

300

INDIA

PANAMA

200

LUXEMBOURG

100

0

140

BAHAMAS

48

MACAU, CHINA

-100

AUSTRALIA

NOTE ON THE DATA

RUSSIA

US

LATIN AMERICA

SAUDI ARABIA

Not all reporting locations cover every nationality. For the periods analysed, 17 of the 20 reporting locations featured in our graphic cover 150 nationalities, while for four of them this extends to over 200. All deposits are reported in billions of US dollars, converted using the end-of-quarter exchange rate. Our illustrations show the change in total deposits held in 20 of the reporting locations over the past year from 20 origin locations. The thickness of the line reflects the change in value over the past year. The size of the node represents total deposits held in the destination location from all origin locations they report on as at June 2017.

TAIWAN

US$200bn

SINGAPORE

97

100

48

BELGIUM

AUSTRIA

0

US$100bn AUSTRALASIA

56

78

TAIWAN

0

SWEDEN

US$100bn MIDDLE EAST

67

59

SPAIN

63

N/A

0

JERSEY

*TOTAL NON-BANK DEPOSITS OF ALL LOCATIONS REPORTED ON

IRELAND

US$100bn RUSSIA & CIS

MONEY MOVING IN

MONEY MOVING OUT

LARGEST CHANGE IN DEPOSITS: DESTINATION, YEAR TO Q2 2017 (US$BN)

LARGEST CHANGE IN DEPOSITS: ORIGIN, YEAR TO Q2 2017 (US$BN)

N/A

0

121.8

TAIWAN CHINA AUSTRALIA CAYMAN ISL. US

90.1

UK US

US$100bn AFRICA

31.1

36.6

15.7

35.1 35.7

HONG KONG, CHINA GERMANY FRANCE

11.9

0

9.8

27.4

SOURCES: KNIGHT FRANK RESEARCH, BANK FOR INTERNATIONAL SETTLEMENTS

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