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Property in the UK has long had an outsized importance for the economy. Land in the region accounts for a disproportionately large 51 percent of the UK’s total net worth, compared with 39 percent in the U.S. and just 26 percent in Germany.1 Yet its appeal to younger, wealthier Britons has dimmed substantially, according to a survey2 by The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management. According to the survey, just 29 percent of younger high-net-worth individuals (HNWIs)3 in the UK own a primary residence, the lowest figure in any of the seven countries surveyed.4 But enthusiasm for real estate has not died, it has merely adapted; instead, younger UK-based HNWIs have been exploring overseas opportunities in property, as well as experimenting with other alternatives at home.

FIGURE 1: Where the heart is
Survey respondents who report owning a primary residence (HNWIs aged 18-54)

Those with the financial means to afford a down payment, either through their own accord or through their family’s wealth, are often choosing to forgo homeownership. According to Javed Khattak, co-founder of Zisk Properties, a real-estate technology company, the driver of this drop-off is partially attitudinal. “There is evidence of change in preferences for some who prefer renting, as it offers flexibility and reduced responsibilities that come with being a homeowner.”

However, there are also deeper economic changes behind this shift. Notably, as an investment, luxury housing has lost a significant measure of its appeal in recent years. Central London luxury property prices, for example, are down 19 percent since 2014,5 while, according to the latest UK Treasury statistics, sales of homes worth more than £1MM fell 12.2 percent year on year (and by 23.1 percent for primary residences) in the second quarter of 2019.6 Against this backdrop, it is little wonder that, when asked about their ability to create, preserve or manage their wealth, a fifth of younger HNWIs cite house price uncertainty as a concern (compared with a little over a tenth of older HNWIs)—a concern also cited by more women investors than men (28 percent vs 22 percent).

Taxing concerns for young, wealthy investors

Of course, housing market worries can manifest themselves in multiple ways beyond just house price uncertainty. For example, among younger HNWIs the number-one concern (cited by 40 percent) is tax changes, which impact property transaction costs (such as via stamp duty). Indeed, it is notable that the decline in higher-end property prices after 2014 followed an increase in stamp duty on homes valued at above £1.5MM from 5–7 percent to 12 percent (and, after April 2016, to 15 percent for second homes).

“The tax landscape has undoubtedly become more adverse for HNWIs buying UK property in recent years,” says Tom Bill, partner and head of London residential research at global real estate consultancy Knight Frank. “Stamp duty hikes led to a stand-off between buyers and sellers as the market repriced. While increased political uncertainty in recent years prolonged this repricing process, reductions have now more than compensated for higher transaction costs. However, some buyers and sellers are still hesitating until greater clarity returns.”

FIGURE 2: Taxing concerns
Which of the following external factors most concern you about your ability to create, preserve or manage your wealth? (Younger British investors, percent choosing each option)

Alternatives and foreign property offer diversification opportunities

However, traditional dreams of property ownership are not dead; rather, they have shifted, possibly due to an appetite for diversification. Rather than focusing on owning their own homes in the UK, the younger generations are concentrating on real estate in other countries. Some 21 percent of younger UK HNWIs are investing in residential real estate and 15 percent in commercial property abroad, compared with 15 percent and four percent, respectively, among their older counterparts.

“A key item to help offset the fear of the unknown is diversification,” says Khattak. “Some options to consider when diversifying within an asset class such as real estate are simply investing into properties spread over different geographies, countries, types such as commercial, industrial, residential, and return types like capital-growth focused versus rental-yield focused.”

This enthusiasm for diversification has also attracted investment in alternatives beyond real estate. “The reasons for this are multifarious, including better-performing alternative assets when compared to U.S. and Canadian counterparts over the past few years, more access to alternatives, and factors like Brexit uncertainty and the economy slowing down, leading to more and more people looking at alternatives to diversify and/or to enhance returns,” says Khattak.

When asked which asset classes most align with their preferences, UK respondents are unusually keen on alternative investments (not including real estate), with 11 percent in the UK choosing this class (compared with six percent in the U.S.). Younger UK HNWIs and the most wealthy (over US$5MM [£4.11MM]) are especially keen (both at 14 percent).

However, with the weaker pound affecting spending power abroad, the UK real estate and alternatives market appears to be at a crossroads. Despite their lack of enthusiasm for domestic, high-end real estate, a fifth of younger HNWIs investors (and 27 percent of younger investors more generally) see real estate as a sector with the greatest investment potential over the next five years. The British passion for high-end real estate investing, which has of late been mostly evident abroad, may soon be coming home.

References
  1. https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/bulletins/nationalbalancesheet/2018
  2. The EIU survey included 411 respondents from the UK. In addition to spanning regions, gender and generations, the survey included HNWIs (those with at least US$1MM [£0.77MM] in investable assets), adult children of HNWIs, and those who are not HNWIs yet but who have a minimum income of US$100,000 [£77,000].
  3. Younger HNWIs are defined as people born between 1965 and 1997 (Generation Z, Millennials, or Generation X). Older HNWIs are defined as people born in 1964 or earlier (Baby Boomer or Silent Generation).
  4. UK, U.S., Canada, Singapore, Taiwan, Hong Kong (SAR) and mainland China.
  5. https://www.ft.com/content/235efd34-8eaf-11e9-a1c1-51bf8f989972
  6. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/821607/Quarterly_SDLT_2019Q2_Main.pdf

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