Each year in March, Knight Frank publishes something called, The Wealth Report, which typically includes things like its Prime International Residential Index (PIRI) and a general overview of what ultra high-net-worth individuals (UHNWIs) are up to with their money.
(An UHNWI is typically defined as someone with a net worth greater than $30 million. And as of last year, there were nearly 400,000 of them around the world, with Hong Kong being the city with the most.)
In anticipation of this year's report, Knight Frank has just published the key findings of an "Attitudes Survey." This is them talking with and surveying private bankers, wealth advisors and family offices about some of the key themes for 2023.
Here are a few of my takeaways:
Globally, about 1/3 of UHNWI wealth is allocated to primary and secondary homes. This is expected. Generally the richer you become, the more your net worth gets diversified away from your primary residence. It is also worth noting that of this 1/3 allocation, more than a quarter is being held outside of their country of residence. This outside-of-country-of-residence percentage is highest for UHNWIs in the Middle East (41%).
The average UHNWI owns 4.2 homes around the world, with UHNWIs in Asia owning the most: an average of five homes. This is the kind of stat that might provide motivation for a foreign buyer ban, but I continue to believe that there are other bigger drivers impacting housing affordability/supply across our global cities.
About 15% of UHNWIs said that they want to purchase a residential property this year (2023). This is down from 21% last year. Inline with bullet point number one, the greatest appetite/stated intent is coming from the Middle East. (Related article: The new Gulf sovereign wealth fund boom)
Real estate was identified as the top investment opportunity. About 1/3 of UHNWIs want to invest in real estate -- either directly or indirectly -- in 2023. And the top asset classes are: healthcare, logistics/industrial, office, multi-family rental apartments, and hotels. It is interesting to see office in the top three. A positive sign that it is maybe being viewed as an oversold opportunity.
Finally, environmental sustainability is being increasingly considered by UHNWIs when it comes to investment properties: 57% are considering energy source(s), 33% are considering opportunities for refurbishment, and 30% are considering the materials used/the embodied carbon footprint inherent to the asset.
For the full findings, click here.
It is well known that Hong Kong has some of the most unaffordable housing in the world and that one response to this has been to build increasingly smaller homes -- some with the moniker of "nano apartments."
But then earlier this year Beijing decided that these nano apartments are actually too small for people, and so a new rule was created requiring homes in Hong Kong to be no smaller than 280 square feet.
At the same time, interest rates obviously went up, the price cap on homes that can be bought by a first-time buyer with just 10% down was increased, and people have continued to leave Hong Kong for places that are, I'm guessing, more open and less Chinese.
The unsurprising result is that home prices are now down some 14% for the year, according to Bloomberg. But the other interesting thing about all of this is that buyers are now shifting toward larger homes:
Developers were only able to sell 48% of the studio apartments available in the first 11 months this year, while the rate for one-bedroom and two-bedroom apartments stood at 53% and 67% respectively, according to Midland Realty.
Even with the interest rate hikes that we have seen, what seems to be happening is that people are starting to take advantage of this softer market to buy something bigger. Hong Kong is still Hong Kong, meaning grab whatever space you can find when you can.
This is an unfortunate distinction:
Of all the world’s housing crises, Hong Kong’s may be the most formidable. The city of 7.3 million leads the world in housing prices and inequality, with 125,100 millionaires and 1.6 million people living in poverty. Home prices have rocketed by 187% over the last decade. In May, the number of public housing applicants hit 245,000, with an average wait time of 6.1 years — the highest in over two decades. According to lawmaker Scott Leung, a shortage of 30,000 units in the next five years means that the public housing queue will soon stretch to 6.5 years.
So let's take a look at overall housing supply (source):
What this chart tells us is the following:
For the five-year period from 2017 to 2021, Hong Kong built about 173,900 housing units. That's somewhere around 34,780 per year.
Of these units, 60,700 were subsidized public rental housing units (~35%) and 25,500 were subsidized sale units (~15%). So overall, about half of Hong Kong's housing supply over the last five years was some form of subsidized housing. That said, the number of public rental housing units has been declining. It was about 70,800 units between 2007 and 2011.
Looking at private residential units during this same five-year period, about 35,200 of them (20% of total supply) can be classified as "small units." These are units with an area less than 40 square meters and, based on the above chart, they obviously represent a rapidly growing market segment.
Adding all of this up, we get to 70% of Hong Kong's housing supply being either (1) a subsidized unit or (2) a small unit under 40 square meters.
This is how Hong Kong builds, and it clearly isn't enough to meet demand.