The UAE has been facing challenges in a post financial crisis environment that have weighed down on the wealth industry. Investors favour cash, are weary of equity markets and the sticky relationships with local advisors make it difficult for international players to make a mark. John Schaffer speaks with Boston Consulting Group and Capgemini analysts to gain more insights
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The UAE has a significant HNW (high net worth) population. According to Capgemini, there are 65,000 HNWIs in the region, controlling $228bn in investable wealth. Yet the UAE, and the Middle East as a whole, trails in comparison to the leading wealth markets of North America, Europe and Asia Pacific.
The rise of HNW wealth in the UAE had been rapid in the lead up to the financial crisis, with growth of 16% and 17% over 2006 and 2007 versus global growth of 6% and 9% respectively.
However, like many markets, the UAE and the region’s wealth were greatly impacted by the financial crisis. The region’s HNW population dipped by 13% and their wealth fell by 20%.
In the post financial crisis years, the UAE has underperformed in comparison to the rest of the world. David Wilson, head of strategic analysis group at Capgemini financial services, tells PBI:
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By GlobalData"The post crisis recovery in the UAE has been a lot slower than in other regions, with the crisis continuing even into 2009/10. Real estate was down by about 50% over 2008.
"Obviously recently we’ve had a lot more headwinds, the weighting of sentiment that the Arab Spring lead to, and then from 2014 onwards, a major fall from the oil crisis."
The recent downturn in the market has caused UAE investors to become more modest in their expectations, according to Markus Massi, partner and managing director at Boston Consulting Group. He tells PBI:
"Expectations are going down in terms of returns from year to year. We did a survey eight years ago and respondents in the UAE were expecting double digit returns. Currently, most investors are happy to get something in the region of a 6%-8% ROI.
"Investors have become realistic in terms of medium term returns, which is a good sign because it shows that markets are maturing."
Liquid appetite
With investor sentiment faltering in the UAE, there has been a significant increase in demand for liquidity. According to Wilson, UAE HNWIs prefer cash, alongside fixed income and real estate over equity investment.
"UAE investors hold more in cash – to head off market volatility and for lifestyle needs. This is in reverse order to the rest of the world, reflecting a more volatile environment since the crisis."
Oil effect
As an oil exporting nation, the dip in global oil prices will has had an adverse effect on the wealth of UAE HNWIs.
However, Wilson suggests that much of the damage will have been mitigated, as a high proportion of HNWIs’ assets are held outside the region.
"UAE HNWIs only hold 37% of their assets in the region. That’s amongst, if not the lowest level of domestic holdings among the 23 countries included in the Capgemini World Wealth Report. Europe and Asia Pacific are the biggest recipients of the rest of their investments.
"Also, almost 50% of their investable wealth is in cash and fixed income, which you could argue is less directly related to wild swings in oil prices."
Massi suggests that when the wealthy invest locally, a high level of understanding is preferred and there is a bias towards more tangible assets:
"In general, there’s a theme of – I want to feel, understand these investments and the region behind them. There are investments in industries that are close to home such as oil and gas, education, healthcare and logistics.
"The locals normally look for anything that comes as close to physical goods as possible, while looking at more sophisticated products. For instance, among private equity funds, they want to know about the individual asset behind the fund structure."
Islamic demand
Although there has been global growth in demand for Shariah complaint products, Massi suggests that Islamic products are only as popular as their returns in the UAE. He says:
"The wealthier you get, the less Shariah compliance is a must. Investors are looking for products that give better return. There’s also a different perception across the Middle East. More conservative countries such as Saudi Arabia and Qatar ideally like to be Shariah compliant. Countries like the UAE or Kuwait are a bit more ambivalent towards Shariah compliance."
Regardless of Shariah compliance, UAE investors appear to have a concentration on investment performance, and are often disgruntled with their wealth manager or private bank if performance is poor. Wilson says:
"The UAE has amongst the lowest levels of satisfaction with wealth managers, though this may be due to there still being a priority on investment performance.
"Firms in other regions have successfully de-coupled satisfaction from investments – given that investment performance is harder to achieve and more commoditised with the rise of low-cost robo-advisors."
Competitive market
International players have found it difficult to dominate the UAE wealth market.
Although there have been notable entrants such as UBP and Arbuthnot Latham, there have also been a number of high profile exits including Pictet, Vontobel and Morgan Stanley. Wilson says there are several reasons for this such as "the need for deep intimacy with wealthy families; market volatility linked to the oil prices; the lack of scale to build operations on the ground within the region (talent, systems, compliance, and such)."
"I have seen two approaches: 1) Traditional firms hiring in executives from international banks, bringing leading practices into the more traditional local brand and relationships. 2) Serving wealthy families in offshore locations such as Singapore or the Channel Islands, where they will value the sophisticated wealth capabilities and the firm can use the existing platform to manage costs, and make it a profitable venture," he explains.
The need for intimate relationships with clients also has a bearing on next-gen strategies, as the trust factor is key in handling succession planning. Wilson adds:
"In the UAE, there is a far greater concentration of wealth in a handful of families, who have long been wealthy given the link to oil prices, which is different to emerging Asia where it is mostly new, entrepreneurial wealth.
"As such, wealth transfer is a family affair and trusted advisors for this will be those having longstanding relationships with the family, making it more challenging for new entrants."
