High net worth
individuals’ wealth is forecast to rise 9% annually in Hong Kong to
$1.2trn by 2015, swelled by markets in China and India.
Shubhlakshmi Shukla gets an update from HSBC’s Olivier
Pacton and finds out about HNWIs changing asset appetites and their
ongoing love affair with real estate
Go deeper with GlobalData
With the second highest
density of high net worth individuals (HNWI) in the world, Hong
Kong has faced challenges in recent years as cautious HNWIs look
for the best opportunities and diversified investments for
sustainable income.
Amid changing attitudes,
Hong Kong’s private banking and wealth management sectors have a
growth potential due to the internationalisation of RMB bond
markets.
In its recent 162-page
report on Hong Kong, The future of HNWIs to 2015, wealth
intelligence provider WealthInsight has estimated that one in every
40 people in Hong Kong is a HNWI.
With 184,000 HNWIs in
2011, Hong Kong has a combined HNW wealth of $845bn, the report
says.
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By GlobalDataIt predicts further
expansion of the wealth management sector in Hong Kong, which has
over $250bn assets under management due to new markets in China,
India and Hong Kong.
The data research
specialist predicts HNWI wealth will rise 9% annually to $1.2trn in
Hong Kong by 2015.
Investors still
cautious
Local industry leaders
agree. “Wealth is growing rapidly in emerging markets, particularly
in Asia – Hong Kong, China, Indonesia, Malaysia and Philippines,”
says Olivier Pacton, HSBC Asia-Pacific managing director and head
of its private banking investment group.
“We see a strong demand
from entrepreneurs for our bespoke advisory or discretionary
services. In addition, there is a need for customised solutions to
hedge or monetise holdings.
“Concerned for capital
preservation, cautious investors are looking for solutions rather
than one-size-fit-all products distributed by a platform,” he
says.
“Although the
uncertainty surrounding the European debt crisis has already been
priced in, investors in Hong Kong are still generally cautious.
They are concerned for capital preservation and are looking for
regular and sustainable income,” he adds.
Pacton explains that
investors often take a ‘barbell’ approach – investing in long and
short duration bonds, but not in intermediate bonds.
“Keeping a high level of
cash combined with specific diversified investments that act as a
standalone can be seen as volatile. Investors have certain levels
of confidence in the US and emerging markets.
“HNWIs are also looking
for opportunities from, say, European luxury goods companies,
Japanese carmakers, Chinese consumer stocks or South East Asian
Equity funds,” he adds.
Commenting on the general
sentiments among Hong Kong HNWIs, Pacton says traditional clients,
as they are getting older, focus more on high income instruments –
corporate bonds or high dividends stocks.
“They generally tend to
have less appetite for equities as they are likely to pass their
wealth to their second generation who are often educated abroad,”
he says.
“This is similar to
Switzerland, with their portfolios being more diversified in terms
of assets classes and geography, mixing conventional investments
and alternatives, advisory and discretionary mandates,” he
observes.
Thematic
approaches dominate
WealthInsight forecasts that Hong Kong’s HNWIs are losing their
appetite for local real estate – traditionally a core asset –
although it remains the largest single asset class, making up more
than 40% of investable assets.
Between 2011 and 2015, WealthInsight expects that residential
and commercial real estate holdings will decline by between 10% and
20% as HNWIs move into other asset classes such as equities.
“We have also seen strong
appetite for thematic approaches in the past 12 months,
particularly for satellite, or tactical, investments; emerging
market consumption and global wireless are two popular examples,”
Pacton adds.
Overall, real estate is
expected to make up 28% of Hong Kong HNWI’s total assets by 2015, a
3% decline from 2011 levels.
The report says Hong
Kong’s property prices are now 50% higher per square metre than
London. Hong Kong’s prime property market grew more than 30% in
2009 and by 15% in 2010.
Unlike most other
international centres, prime property prices in Hong Kong are now
well above the levels reached before the global financial crises,
it adds.
According to
WealthInsight analyst Andrew Amoils, the bubble in Hong Kong’s
residential and commercial real estate prices is seen by many
locals to be a consequence of the government’s relationship with a
small group of property tycoons.
“While this has
contributed to the property market growth, the bubble is also being
fuelled by the large number of Chinese nationals buying property in
Hong Kong,” says Amoils.
“Chinese buyers include
individuals launching companies in Hong Kong and HNWIs wanting
permanent residency, which mainlanders can get by making a minimum
capital investment of HKD6.5m ($800,000),” Amoils adds.
Highly prized
citizenship
Gaining Hong Kong
citizenship is a major concern for mainland buyers as it offers
several benefits for Chinese HNWIs, including lower taxes and
increased freedoms, and notably the freedom of movement.
Hong Kong citizens are
able to travel visa-free to a large range of countries whereas
Chinese nationals require visas to travel to most countries.
“Hong Kong offers greater
investment diversity than in China both in terms of freedom to
invest abroad – due to the lack of exchange control – and to the
region’s more extensive product offering,” the report says.
Pacton says private
banking customers look for high-yield corporate bonds in property
companies, real estate investment trusts and club deals.
HSBC has had success in
the past few years bringing these club deals together for
syndicates of 10 to 20 private clients, particularly in the US.
Pacton says the chance to
buy commercial real estate through club deals is a new trend among
HSBC’s Asian ultra-HNW clients.
“We’ve seen strong
interest from our most wealthy clients in commercial real estate
club deals in the US, where the occupier market is improving due to
some economic recovery and yields being supported by the Federal
Reserve’s low interest rates policy,” he says.
WealthInsight’s research
backs up Pacton’s experience. It expects foreign property
allocations in prime property in international centres, such as
London, to rise from 11.1% in 2011 to 11.5% by 2015.
Along with other factors,
Hong Kong HNWIs are also looking to increase their holdings in
emerging Chinese cities such as Tianjin and Chongquing as well as
other high potential emerging markets in Southeast Asia.
WealthInsight suggests
losses for Hong Kong’s HNWIs softened as more than half of their
foreign property holdings were in mainland China where the property
market performed well.
Notably, investors from
Hong Kong, Taiwan and Macau accounted for a large amount, 20%, of
all property purchases in mainland China’s 15 cities in 2010,
according to WealthInsight.
RMB
internationalisation
Besides the highly-prized nature of property in Hong Kong, the
country’s place as the first home of the offshore renminbi (RMB) is
boosting its profile.
“The People’s Republic of
China’s Twelfth-Five-Year Plan showed progress toward the
internationalisation of the Chinese currency for the first time,
this gives support to the development of Hong Kong as a Chinese
offshore and international asset management centre,” says
Amoils.
The Hong Kong Markets
Authority has also been working with the city’s big banks to
facilitate the growth of the market. HSBC has been quick to take
advantage of the growth in the RMB, including launching the first
RMB bond in London in early May.
Compared with the G7
currencies, RMB offers an attractive alternative, says Pacton. “Our
clients are very active in this space.”
“New payouts in equity
rates, or foreign exchange, are available for structured products,
RMB funds or CNH tranches of our flagship funds of funds, which is
gaining traction. The RMB internationalisation has further
facilitated the development of the RMB bond market,” he added.
Hong Kong is becoming
increasingly important as a wealth management hub.
This is underlined by the
news that Jeff Urwin, head of global investment banking coverage at
JP Morgan and a member of the bank’s executive committee, relocated
to Hong Kong from New York in May.
The US bank already has
its global private banking head, Douglas Wurth, based there. Having
two leaders of one of the world’s most successful banks based there
is further evidence of the city state’s sway.
