—view from The Buckingham in Arlington—
In the most recent edition of Barron’s, Robert Milburn put some specifics to a trend which has been in motion for many years, and is likely to accelerate. This trend is for the world’s “mega rich” to be major real estate investors worldwide. I have touched on in the past in RayMaxInternational reports, and Milburn reveals more reasons for this trend..
A summary of Milburn’s points is below. Following that, and in some cases interspersed with it, I will discuss reasons why Washington, D.C. and close-in Northern Virginia locations could be surprisingly strong beneficiaries of this trend going forward.
The Numbers in Summary -The world of the ultra-affluent is driving real estate values worldwide, and changing the dynamics of many of the world’s major urban areas/ elite vacation locations. They are more mobile than ever, probably holding multiple passports, maybe willing to change citizenship or seek multiple citizenships, and looking for safer and more exotic ways to increase their asset base. They generally like to operate in a stealth manner, and this has resulted in much of the real estate activity being a bit under the public radar. However, more people are becoming aware of these trends, and we may be in the very early stages of this boom in international real estate investing.
According to Wealth-X, a research firm studying wealth trends, there are now more than 200,000 “ultra-high net worth” people in the world (assets of $30 million or more). The total amount they control is about $30 trillion. Wealth-X has performed some calculations that may be debatable, but certainly shed light on the potential. They say that about half of this wealth will transfer to heirs within 20-30 years, and assuming that the ultra-wealthy population increases by 4.6% annually (their assumption), this will lead to an increase in the wealth they control by 6.7% annually. At this rate, the billionaire population in the world will reach 1,700 by 2020, an 80% increase.
Your head spinning yet? Let’s put the number in perspective: Just the transfer of wealth alone is the equivalent of the current U.S. economy.
For those looking for some sort of political statement associated with these facts, you will have to read another author’s work. My goal here is to make some attempt to determine where that wealth will invest, and that is a Rubic’s Cube which many are attempting to solve. Wealth-X says that the average age of the uber-wealthy is 59, two-thirds of them are “first-generation wealth creators”, and they currently keep 38% of their net worth in privately-held businesses. Their average net worth is $141 million.
A growing trend which will only accelerate will drive certain types of real estate. The scenario is as follows: The uber-wealthy are increasingly world travelers. The average billionaire owns four properties worth an average of $78 million. In almost all cases, this is diversified into purchases of property outside of their “home country”. At RayMaxInternational, we call U.S. real estate the new “safe haven currency” for many people from around the world. Wealth-X says that, “luxury real estate is the new Swiss bank account.” Given the push for more disclosure within Swiss accounts, that is more true than ever.
With worldwide instability a given, many of the wealthiest people are from countries which historically have not been particularly stable politically, socially, or economically. At RayMaxInternational, we have reason to believe that this is the major driving force in the uber-rich “asset diversification” in protected investments such as prime U.S. real estate. The international ultra-rich often have multiple passports, less loyalty to a “home country” of birth, take advantage of immigrant investor programs, often seek multiple residency, and, it appears to us, are using prime real estate as escape hatches from potential future home-country political or economic turmoil.
I realize that this last factor is not often discussed, but it is worth considering: Having worldwide real estate holdings and multiple citizenship serves as an insurance policy for many of the world’s wealthiest people. Add this to the mix of globe-trotting “play”, the power in holding premier properties worldwide, and the potential influence in holding such properties, and you have a powerful elixir as to why this trend will continue. Traditional real estate measures of value and investment worthiness are secondary in most of these cases. Safety, power, and prestige take precedent.
People often ask about flows from the United States. How many wealthy Americans invest their money overseas in such transactions? What is the net effect of inflows to outflows of capital?
In answer to these questions, a major financial issue raised by the ultra-rich is the “punitive” way the United States taxes overseas investment and worldwide income, at least according to those affected. According to Wealth-X, this has led to a trend of many Americans seeking to renounce their U.S. citizenship, and in 2013, almost 3,000 individuals had done so. This number would be even higher if U.S. tax policy was not comparatively strict in reaping “exit” taxes on unrealized capital gains. Recent drumbeats to lower such taxes in the name of a more open international capital flow could lead to a surge in U.S. expatriation.
The Impact on Future Real Estate Investment in the USA – For those who have been on vacation the last few years without any means of communication, there has been a surge of ultra-rich investment in U.S. cities, particularly driving prices skyward in Miami, New York, San Francisco, and similar known international venues. At this point, one must question the economic viability of investing heavily in these places at these prices. In many situations, the price will not matter. But at some point, capital will seek other locations.
Is Washington, D.C. Next in Line? – The Washington, D.C. market, and close-in suburbs, have experienced a renaissance of sorts which has driven up real estate values and generated a far different urban buzz than anyone familiar with the area had ever felt possible. However, this may be merely the starting point and base structure which elevates Washington, D.C. into prominence as a true world capital beyond the mere political realm.
The RayMaxInternational group has often mentioned that D.C. height restrictions on building in the District itself would be a boon to investors “across the river” in Arlington and Alexandria, especially those who could take advantage of the breath-taking views which cannot be duplicated in the District. I often hear local people amazed at the prices for close-in condominiums with great views, but these are precisely the types of homes which will cater to the international uber-rich discussed earlier. Traditional measures of value will need to be altered in these select locations, these select buildings, and the more elegantly spectacular units within these buildings. The buyers will be less price-sensitive, and your appeal will be to a life style, prestige, and proximity to power that will appeal to an uber-rich international market.
The future may be as follows:
• The increasingly mobile and expanding international financial growth will continue to look for safe havens, and ownership of U.S. real estate is as safe as they will find if for no other reason than to park capital without fear of expropriation.
• Other cities will begin to be targeted, and the growing sophistication of Washington, D.C., combined with living in the ultimate international political power center, will be a strong magnet to the international crowd.
• The relatively limited supply of residential housing which fits the desired criteria will force upward pressure on these properties.
• The ability for developers to create luxury alternatives which appeal to the super-rich are very limited in Washington, D.C. which is a boon to existing stock. Any new development squeezed out of whatever prime location can be found and re-zoned for this purpose will prove to be a strong long-term investment, assuming it is developed to take advantage of the growing appeal of Washington, D.C, proper.
For More information and Discussion….. I welcome any and all discussion on this fascinating topic and the likely winners/losers in the future of high-end D.C. real estate.
I direct your attention to http://www.RayMaxInternational, which can be read in almost any language. There will be significant new content added over the coming weeks and months, and the specific search engines provide more focused and accurate, timely information on available listings than one will find from on-line real estate sites.
I look forward to discussing this topic with anyone who shares my interest in the dynamic world of international real estate in which we live.
Ray Wedell, RE/MAX Gateway
Chartered Financial Analyst, CFA