THE DNITIVEEfI PRIME RESIDENTIAL BRIEfING … › KF Wealth...The term ‘prime property’ equates...

A G L O B A L P E R S P E C T I V E O N P R I M E R E S I D E N T I A L P R O P E R T Y A N D W E A L T H

THE DEfINITIVE PRIME RESIDENTIAL BRIEfINGTHE WORLD’S MOST INfLuENTIAL CITIESfOCuS ON PROPERTY MARkET INVESTMENT

NEW HIGH fOR CONTEMPORARY ARTASIA PACIfIC PRIME REAL ESTATE OuTLOOk

WHERE THE WEALTHY ARE INVESTING

Prime, prestige, luxury – all labels applied to the top end of the residential property market in different parts of the world. While the names may differ, the desire of High¯Net¯Worth Individuals to own and invest in the best property is ubiquitous around the globe. As we discover in our focus on prime property in Asia Pacific (page 18), even the world’s smallest emerging economies, such as Cambodia, are promoting themselves as development hotspots and attracting growing amounts of internal and external investment. The tangible and straightforward nature of residential property, especially when the outlook for other asset classes is uncertain, explains this attraction. The results of The Wealth Report’s 2010 Attitudes Survey (page 40) clearly indicate that HNWIs, wherever they are around the world, still see property as one of the best assets to own, with most predicting values to grow in 2010. Furthermore, property is viewed as a strategic investment that can ride out economic cycles. Most of the survey’s respondents said they were interested in long¯term capital growth from their property portfolios, rather than income. Despite this globalisation of property as the “must¯have” asset class, it would still be wrong to talk about the marketplace for the world’s most desirable properties as a single entity. Just as the labels vary, so do the characteristics of individual markets, not only between continents and countries, but also from city to city and region to region. Each market – as highlighted by the latest results from our Prime International Residential Index (page 6) – sits in a different part of the economic cycle. Some are booming to the point where overheating is once again a concern, while others are still struggling to shake off the impact of the global recession. Market drivers are also becoming more nuanced in the light of varying government responses to the credit crunch. Cities like Washington DC and Beijing, as The Wealth Report 2010 Global Cities Survey (page 34) discusses, now find themselves transformed into banking as well as policy hubs, attracting a new breed of property owner. The last decade witnessed huge shifts in the global property market with many new opportunities emerging. The next 10 years are likely to see even more changes. Luxury, prime or prestige – however you like to describe them – The Wealth Report 2010 offers a unique and invaluable insight into the world’s most valuable property markets.

CONTRIBUTORS

ANDREW SHIRLEY Andrew,whennotediting

TheWealthReport2010,isheadofruralpropertyresearchatKnightFrank.ForthisissueheinterviewedTrudieStylerabouttheItalianestatewheresheandhusbandStingarecreatingtheirownwine.

PAGE 44

LIAM BAILEY LiamisTheWealthReport’s“editor

atlarge”andalsoheadsupKnightFrank’sresidentialresearchteam.Helikestotakeaglobalviewandinthisissuereviewsthemarketforprimeresidentialpropertyaroundtheworld.

PAGE 6

SEBASTIAN DOVEY SebastianisheadofScorpio

Partnership,whichspecialisesinadvisingthewealthmanagementindustry.ForTheWealthReport2010helooksatwealthpatternsaroundtheworld.

PAGE 28

IAN BREMMER Aleadingauthorityonpoliticalrisk

andheadofEurasiaGroup,IanoffersWealthReportreadershisperspectiveonthefactorsshapingtheworld’spoliticallandscapein2010.

PAGE 30

JONATHAN FENBY Chinaexpertandco-founderof

respectedemergingeconomiesanalystTrustedSources,JonathanlooksatBeijing’schangingglobalroleasthenation’seconomicpowercontinuestogrow.

PAGE 38

ADRIAN WOOLDRIDGE AsTheEconomist’sformer

Washingtonbureauchief,AdrianhasexperiencedtheuniquenatureoftheUS’scapitalcity.HeshareshisinsightinthelatesteditionofourGlobalCitiesSurvey.

PAGE 39

KNIGHT FRANK TERMS AND DEFINITIONS

HNWIisanacronymfor'high-net-worthindividual’,apersonwhoseinvestibleassets,excludingtheirprincipalresidence,totalbetween$1mand$10m.AnUHNWI(ultra-high-net-worthindividual)isapersonwhoseinvestibleassets,excludingtheirprimaryresidence,arevaluedatbetween$10mand$100m-plus.Theterm‘primeproperty’equatestothemostdesirable,andnormallymostexpensive,propertyinadefinedlocation.Commonly,butnotexclusively,primepropertymarketsareareaswheredemandhasasignificantinternationalbias.Exchangerates:unlessotherwisestatedthesewerecalculatedusingtherateonFeb12010.TheWealthReport2010AttitudesSurvey:theparticipantsofthesurveycomprisedclientsofCitiPrivateBank.Surveyconductedbetween1December2009and31January2010.WrittenandeditedbyAndrewShirleyandLiamBailey,KnightFrankLLP.Forresearchandpressenquiries:LiamBailey,KnightFrankLLP,55BakerStreet,LondonW1U8AN+44(0)2078615133

THE WEALTH REPORT 2010

Content and editing: Knight FrankWealthReportEditor–AndrewShirleyEditoratlargeandheadofresearchcontent–LiamBailey

Marketing and PRForKnightFrank–RebeccaMaherForCitiPrivateBank–PaulineLoohuis

Design and art direction: Smith & MiltonStrategicDirector–DavidHaselerCreativeDirector–StevenAndersonSeniorDesigner–AndyIsaacAccountManager–MarkMobbsProductionManager–KevinO'Brien

Printing: MurrayArbiteratQuadracolourLimited

Front and back cover image: PhotographedbyDuncanKendalWithspecialthankstoBentleysofLondon

Photography:JamesDay,JoachimLadefoged,SannaKannisto,RossHoneysett

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©KnightFrankLLP2010Thisreportispublishedforgeneralinformationonlyandnottoberelieduponinanyway.Althoughhighstandardshavebeenusedinthepreparationoftheinformation,analysis,viewsandprojectionspresentedinthisreport,noresponsibilityorliabilitywhatsoevercanbeacceptedbyKnightFrankLLPforanylossordamageresultantfromanyuseof,relianceonorreferencetothecontentsofthisdocument.Asageneralreport,thismaterialdoesnotnecessarilyrepresenttheviewofKnightFrankLLPinrelationtoparticularpropertiesorprojects.ReproductionofthisreportinwholeorinpartisnotallowedwithoutpriorwrittenapprovalofKnightFranktotheformandcontentwithinwhichitappears.KnightFrankLLPisalimitedliabilitypartnershipregisteredinEnglandwithregisterednumberOC305934.Ourregisteredofficeis55BakerStreet,London,W1U8AN,whereyoumaylookatalistofmembers’names.

TheWealthReportisprovidedasaservicetoclientsofCitiPrivateBank.TheviewsexpressedhereinarethoseofKnightFrankLLPandassociates,anddonotnecessarilyreflecttheviewsofCitiPrivateBank,CitigroupInc.,CitigroupGlobalMarketsInc.,anditsaffiliates.Allopinionsaresubjecttochangewithoutnotice.Neithertheinformationprovidednoranyopinionexpressedconstitutesasolicitationforthepurchaseorsaleofanysecurity.Pastperformanceisnoguaranteeoffutureresults.CitiPrivateBank”isabusinessofCitigroupInc.,whichprovidesitsclientsaccesstoabroadarrayofproductsandservicesavailablethroughbankandnon-bankaffiliates.Notallproductsandservicesareprovidedbyallaffiliatesorareavailableatalllocations.IntheU.S.,brokerageproductsandservicesareprovidedbyCitigroupGlobalMarketsInc.(“CGMI”),memberSIPC.GGMIandCitibank,N.AareaffiliatedcompaniesunderthecommoncontrolofCitigroup.OutsidetheU.S.,brokerageproductsandservicesareprovidedbyotherCitigroupaffiliates.IntheUnitedKingdom,CitibankN.A.,LondonbranchandCitibankInternationalplc,CanadaSquare,CanaryWharf,LondonE145LB,areauthorizedandregulatedbytheFinancialServicesAuthority.ThecontactnumberforCitibankN.A.LondonbranchandCitibankInternationalplcintheUnitedKingdomis+44(0)2075088000.InJersey,thisdocumentiscommunicatedbyCitibankN.A.,JerseyBranchwhichhasitsregisteredaddressatPOBox104,38Esplanade,StHelier,JerseyJE48QB.CitibankN.A.,JerseyBranchisregulatedbytheJerseyFinancialServicesCommissiontoconductdeposittakingbusinessundertheBankingBusiness(Jersey)Law1991andinvestmentbusinessundertheFinancialServices(Jersey)Law1998.CitibankN.A.,JerseyBranchisamemberoftheDepositorsCompensationSchemeassetoutintheBanking(DepositorsCompensation)(Jersey)Regulations2009.Furtherdetailsoftheschemeareavailableonrequest.Citi,andCitiwiththearcdesignareregisteredservicemarksofCitigrouporitsaffiliates.©2010Citigroup.Allrightsreserved.

Andrew ShirleyEditor of The Wealth Report 2010

UNITED STATES

2,519,000

-19%

UNITED KINGOM

439,000

-21%

JAPAN

669,000

-12%

CHINA

343,000

-11%

GERMANY

342,000

-9%

FRANCE

266,000

-14%

ITALY

232,000

-18%

CANADA

216,000

-19%

BRAZIL

181,000

-9%

SWITZERLAND

165,000

-13%

AUSTRALIA

146,000

-20%

MEXICO130,000

-4%

RUSSIA101,000

-23%

NETHERLANDS100,000

-22%

SPAIN97,000

-18%

SOUTH AFRICA96,000

-11%

INDIA85,000

-24%

HONG KONG72,000

-23%

SINGAPORE58,000

-22%

ARGENTINA49,000

-13%

BELGIUM46,000

-23%

CHILE30,000

-2%

UAE21,000

-2%

COLOMBIA20,000

-2%

INDONESIA19,000

-16%

PORTUGAL13,000

-24%

ISRAEL7,000

-12%

KNIGHTFRANK.COMCITIPRIVATEBANK.COM

THE WEALTH REPORT

PROPERTY

6 GLOBAL VIEWKnightFrank'slatestresearchontheperformanceofprimeresidentialpropertymarkets

12METAMORPHOSISInvestorsreturntothepropertyinvestmentarena

17 ISLAMIC FINANCINGWhyShariacompliantinvestmentsareontheup

18 ASIA PACIFIC IN BLOOMTheregion'skeypropertymarketsandeconomiesinfocus

THE WEALTH REPORT

MONITOR

28 SPREAD THE WEALTHWheretheworld'swealthylivenowandwherefuturewealthwillbebased

30 GLOBAL WEALTH RISKSExclusiveanalysisforTheWealthReport2010fromEurasiaGroup'sIanBremmer

34 THE NEWPOWER BROKERSKnightFrank'sauthoritativeguidetotheworld'smostinfluentialcities

THE WEALTH REPORT

TRENDS

26 ART FOLLOWS COMMERCEThecontemporaryartmarketbouncesbacktoarecordhigh

THE WEALTH REPORT

ATTITUDES

40 SMART MONEYTheWealthReport'suniquesurveyofHNWIattitudestopropertyandwealth

44 TRUDIE STYLERExclusiveinterviewwithTrudieStylerabouttheItalianestatesheshareswithhusbandSting

CONTENTS

} }}}

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http://knightfrank.com

http://citiprivatebank.com


China–almostinevitably–dominatesthetopofourtable.InShanghaipricesrosebyover50%lastyearwithBeijingclosebehind.Localcommentatorsareconvincedthatpricegrowthatthisrateisnotnecessarilyabubbleinthemaking–pointingtosomeprettycompellingmarketfundamentals,whichwediscussbelow. Overthepast12monthswehaveseenagreatreversaloffortune–theworstperformersin2008,ledbyHongKong(whichhasmovedfrom55to3inourranking),Singapore(51to5),andLondon(53to9),werelastyear’sbest. Thesemarketshaveallconfirmedtheattractionofprimeresidentialproperty.Whenpricesfall,

demandisquicktore-establishitselfwithbuyersandinvestorslookingtocapitaliseonthebettervalueoffered.Atthesametimesupplybecomesconstrainedasdevelopmentschemesareputonholdduringtheinitialstagesofthemarketdownturn. Awayfromthesegrowthmarkets,thepricefallsthatbeganin2007were,by2009,afflictingawiderrangeofglobalmarkets.Inlastyear’sreportwerevealedthat41%oftheprimemarketswetrackedhadseenannualpricefalls;thisyearthefigureis73%. WithpricesfallingintheMiddleEast(Dubai-45%andAbuDhabi-10%),Europe(Western

Algarve-30%andDublin-25%),theCaribbean(Barbados-20%),theAmericas(NewYork-12.5%andSanFrancisco-16%)andevensomelocationsinAsiaPacific(KualaLumpur-1.8%),thedownturnwenttrulyglobalin2009. Inmostlocations,however,lookingatannualgrowthfiguresdoesnottellthecompletestory.Thevastmajorityofpricefallstookplaceinthefirsthalf,ifnotthefirstquarteroftheyear.InNewYork,forexample,pricesfellmorethan12%in2009,butactuallyroseby2%inthefinalsixmonthsoftheyear.Marketsrecoveredonthebackofimprovedconfidenceandthereturnofglobaleconomicgrowth.

How we track tHe world’s markets…

the knight Frank Prime International residential Index (PIrI) is the most comprehensive analysis of global luxury residential markets. Our index is compiled using data supplied by our global network. All annual price growth figures relate to the 12 months to the end of December 2009. Prime property is the most desirable, and normally most expensive, property in a defined location. Commonly, but not exclusively, prime property markets will be areas where demand has a significant international bias.

Threeyearsintotheglobalhousingmarketdownturn,andatthetailendoftheworld’sworstrecessionfor70years,wemighthaveexpectedtoseethebeginningofaslowandmeasuredpropertyrecovery.Instead,ontheonehand,wehavestronggrowthinLondonandhugeupliftsinkeyAsianmarkets.Ontheother,priceswerestillfallinglastyearinthree-quartersofthelocationsfeaturedinourPrimeInternationalResidentialIndex.Liam Baileyexploresthisongoingparadox

GLOBAL VIEW

7 }

THE WEALTH REPORT

PROPERTY Knight FranK Prime international residential index



0 5 10 15 20 25 30 35 40 45 50 (%)

-50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0(%)

16 171827 19

20

21 2223

2425

26

2829

3031 32 33

3435

3637 38 39

40

41

42

43

44 4546

4847

4950

51

5253

54

55

56

15 1413

12 1110

9

8 7

6

5 4

3

2

1

0 5 10 15 20 25 30 35 40 45 50 (%)

-50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0(%)

16 171827 19

20

21 2223

2425

26

2829

3031 32 33

3435

3637 38 39

40

41

42

43

44 4546

4847

4950

51

5253

54

55

56

15 1413

12 1110

9

8 7

6

5 4

3

2

1


THE WEALTH REPORT


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PRICE CHANGE

PRICE CHANGE

Aninterestingdivergenceinperformancecanbeseenwhenwesplitourresultsbylocationtype.Onanunweightedbasispricesfellbyaround5%in2009inthe56primemarketswetrack.Coastalandcountrysecondhomelocationssawpricesfallby14%and11.9%,respectively.Europeanskiresortswereslightlymoreresilient–fallingby12%.Butprimecitylocationsweremuchhealthier,postinganaverageriseof0.4%overtheyear. Themarketrecoveryinthecitiesatthetopofourtableshowsrenewedconfidenceintheperformanceofprimeproperty,whichiswelcome,butthereisadegreeofconcernaroundthespeedandstrengthoftheturnaround.Thecaseforprimemarketoutperformance,whichweoutlineabove,iswellmade–butthereareotherfactorsatplay. Wehavetoconsiderthecurrentsupportformarketgrowthcreatedbyultracheapmoney.Infactitisnotjustpropertymarketsthathavesuccumbedtoexuberance–equitiesandcommoditiessawpricespushedupsharplyduring2009. Rock-bottominterestratesandthe“creation”ofmoneyviagovernmentstimuluspackageshaveledtoaninjectionofliquidityintotheworldeconomy,whichhasfound,inevitably,itswayintoassetmarkets,includingproperty,goldandshares. Lowinterestcostshaveprotectedpotentiallydistressedownersandreducedthesupplyofpropertyforsale.Atthesametime,lowsavingsrateshaveencouragedthewealthytomoveinvestmentsoutofcashandintopropertyinthesearchforacceptableyields.Thishasdrivendemandforpropertyhigherand,setagainsttightsupply,hasservedtopushvaluesupwardsinmanylocations. Ironically,theunintendedconsequenceofgovernmenteconomicstimuluspackageshasbeentosupportdemandandpricingintop-endresidentialmarkets–probablynotsomethinggovernmentswouldreadilyadmitto. Weoughtnot,however,tobetoopessimistic.ThefundamentalsindevelopingmarketsthatwediscussinmoredetailinourAsiaPacificFocusareveryimpressive.ThescaleofdemandinChina,forexample,confirmstheneedfornewhousingintheAsianpowerhouseeconomies–8.5mnewhomesweresoldinChinain2009,comparedwithabout500,000intheUS. TalkingtoQuekKwangMeng,headofAsiaPacificrealestateinvestmentsforCitiPrivateBank,thepowerofthisdynamicisreinforced.Queksaysthatevenifeconomicgrowthslows,ruralmigrationislikelytoswellChina’surbanareasby200mpeoplewithin15years. InIndiatherequirementforaccommodationisgrowingasrapidlyasinChina.Despitestrongpricegrowth(Mumbai+11%in2009)themarketappearsatlittleriskofoverheating.TheproportionofmortgagedebttoGDP,whichhashit70%andmoreincountriesinthedevelopedworld,stillsitsataround10%inIndia–despiteaquadruplinginthesizeofthismortgagemarketinasingledecade.

ASIA PACIFIC17.1%

AFRICA10.7%

SOUTH AMERICA7.8%

-7.7%NORTH AMERICA

-12.0%EUROPE

-13.3%CARIbbEAN

-27.5%MIDDLE EAST

-5.5% GLObAL

CITY0.4%

-11.9%COUNTRY SECOND HOMES

-12.0%SKI

-13.9%COASTAL SECOND HOMES

-5.5% ALL

2009 RESULTS BY WORLD REGIONUNWEIGHTEDANNUAL%CHANGE

PRIME PROPERTY PRICES IN KEY GLOBAL CITIES, Q4 2009

2009 RESULTS BY LOCATION TYPEUNWEIGHTEDANNUAL%CHANGE

AbOVE 40% 1. SHANGHAI* 52.0% 2. bEIjING* 47.0% 3. HONG KONG 40.5%

bETWEEN 10% AND 20% 4. jOHANNESbURG 17.0% 5. SINGAPORE 17.0% 6. jAKARTA 14.0% 7. MUMbAI 11.0% 8. RIO DE jANEIRO 10.0%

bETWEEN 0% AND 9% 9. LONDON 6.1% 10. WASHINGTON DC 5.6% 11. SAO PAULO 5.6% 12. bANGKOK 4.6% 13. CAPE TOWN 4.3% 14. HOME COUNTIES (UK) 1.4% 15. ZURICH 0.0%

MINUS 0% TO 9% 16. TORONTO -0.5% 17. SYDNEY -0.5% 18. KUALA LUMPUR -1.8% 19. ITALIAN LAKES -6.1% 20. MOSCOW -6.3% 21. CAP FERRAT -7.5% 22. VALbONNE -7.5% 23. ST TROPEZ -7.5% 24. CENTRAL ALGARVE -7.5% 25. VAL D'ISERE -8.0% 26. ST PETERSbURG -8.9% MINUS 10% TO 14% 27. CAYMAN ISLANDS -10.0% 28. GENEVA -10.0% 29. AbU DHAbI -10.0% 30. MEGEVE -10.0% 31. CANNES -10.0% 32. PROVENCE -10.0% 33. MUSTIqUE -10.0% 34. THE HAMPTONS -11.0% 35. PARIS -12.0% 36. LOS ANGELES -12.1% 37. COURCHEVEL -12.4% 38. TOKYO** -12.5% 39. MANHATTAN (NEW YORK) -12.5% 40. MERIbEL -12.6% 41. UMbRIA -14.0%

MINUS 15% TO 20% 42. MONACO -15.0% 43. SAN FRANCISCO -15.7% 44. TUSCANY -16.0% 45. KIEV -16.0% 46. CHAMONIx -17.0% 47. GASCONY -17.0% 48. MALLORCA -17.0% 49. FLORENCE -18.0% 50. bORDEAUx -18.1% 51. DORDOGNE -19.5% 52. bARbADOS -20.0%

MINUS 21% TO 50% 53. PALMA -22.0% 54. DUbLIN -25.0% 55. WESTERN ALGARVE -30.0% 56. DUbAI -45.0%

ACKNOWLEDGEMENTS All data Knight Frank research except:

MANHATTAN, THE HAMPTONSPrudentialDouglasEllimanandMillerSamuelInc.TOKYOColliersHalifaxTORONTOHarveyKallesRealEstateLtdWASHINGTON DCEvers&CoLOS ANGELES, SAN FRANCISCOFirstRepublicPrestigeHomeIndex

FOOTNOTES*bEIjING & SHANGHAIBasedonurbanareasonly**TOKYOChangebasedonlandvalues,latestdataJuly2009

Inother,moremature,marketstherearequestionsregardingthesustainabilityofboomingpricegrowth. InHongKong,forinstance,themarketgrewstronglyin2009onthebackofalowinterest-rateenvironmentandaninfluxofcapitalandlendingfromthebanks.Allsectorssawanimprovement.TheHK$10m+sector,inparticular,benefitedfroma44%growthintransactionvolumestomorethan6,700.

Government intervention

Inlightofthisstronggrowth,theHongKonggovernmenthasthreatenedmeasurestorestrictthemarket–notablythroughmortgagelendingrestraint,reducing,forexample,themortgagelimitforluxurypropertyfrom70%to60%.Despitethesepotentialrestrictionsthemarketcontinuestogrow. Thisexamplepointstoaninterestingdevelopment.ThecripplingimpactofpropertybubblesburstinginEuropeandtheUShascreatedamuchmoreconfidentlyinterventionistapproachinChina,HongKongandSingapore(wherecoolingmeasureswereintroducedinSeptemberlastyear)amongothermarkets. Thereisaslightlytroublingaspecttothis.Withgovernmentsbroodingintheshadows,readytoburstincipientbubblesassoonastheyemerge,ahighdegreeofskillisassumedfrompolicymakers.Theabilityofmarketstojustifycurrentpricingdependstoalargedegreeoncontinuedcreditavailability.Thesecurityofpricinginthesemarketsisyettobetested.Ifbanksweretorestrictliquidityortopushupthecostsoffinancethereisanobviousriskofacorrection. ThismoreaggressivegovernmentstanceisnotlimitedtoAsia.FromEuropetotheUS,governmentshavebeenmakingmoreactiveuseoftheeconomictoolsattheirdisposalandasaby-productofbailingoutbanksin2008theyhaveconsiderableinfluenceoverlendingpolicies.Wecanexpecttoseemore,notless,publicsectorcontrol,atleastovertheshortandmediumterm.

Future considerations

Lastyearweposedaquestion:wasthedownturnleadingtoasimplere-pricingofassetsthathadbecomeovervalued,orsomethingmorefundamentaloccurringintheglobaleconomythatwouldmeanprimemarketpricingwouldbefurthersuppressedandtakealongtimetorecover? ToprovideananswerwepointedtotheemergingevidenceinLondon–acityattheepicentreofthedownturn–wherewewerebeginningtoseewealthybuyersreturntothemarket. Wesuggestedthatwhilenomarketcouldescapeabubble-and-bustscenario,theevidencewasbuildingthatwhenthemarketbelievedthatpriceshadreturnedtoofferinggoodvalue,activitywouldriseandtheperennialfactorsthatmadeaprimemarketdesirablewouldendure.Namely,limitedsupply,thegrowthofdemandinlinewiththeexpansionofglobalwealthandtheclusteringofthewealthyinestablishedmarkets. Thisisexactlywhathappened.SupplyfellinLondonandalsoincountlessothermarketswhereaffluentownersortop-endpropertydevelopersdecidedtorefrainfromsellingatnewlowerprices.Demandthenroseasbuyerslookedhopefully,butofteninvain,tosecurestockatbargainprices.Aswehaveseen,thosemarketsthatappearedtobeonthevergeofcollapseayearagohavebouncedbackfromtheravagesofthecreditcrunch. Theissuefor2010ishowsecuretherenewedbounceinpricingisinthemarketsatthetopofourtable.Ourviewisthatmostprimemarketsaresufferingfromanundersupplyofstockandthiswillhelpmaintainpricesintheshortterm.Lookingfurtherahead,however,itisthoselocationsthatofferagenuinelifestyleattractiontotheworld’swealthy,ratherthanjustaninvestmentopportunity,thatwillprovemostsustainable.

LOCATION FROM TO FROM TO

US$ Sq FT € Sq M MONACO 4,300 5,900 36,000 44,000 LONDON 3,600 4,400 26,900 32,900 PARIS 2,400 3,300 20,300 24,800 HONG KONG 2,000 2,500 15,000 18,800 ROME 1,800 2,500 15,000 18,500 GENEVA 1,800 2,500 15,000 18,500 MOSCOW 1,700 2,400 14,000 17,700 SYDNEY 1,700 2,300 14,000 17,100 TOKYO 1,600 2,200 13,800 16,900 MANHATTAN (NEW YORK) 1,500 2,100 12,600 15,400 SINGAPORE 1,500 2,000 12,600 15,100 MUMbAI 1,200 1,400 9,300 11,300 SHANGHAI 500 700 4,000 5,300 SOURCE:KNIGHTFRANKRESEARCH

IN GROWTH

IN DECLINE

THE KNIGHT FRANK PRIME INTERNATIONAL RESIDENTIAL INDEx RESULTS FOR THE 12 MONTHS TO DECEMBER 2009



THE WEALTH REPORT


11 |

A TALE OF TWO NATIONS The Wealth Report looks in detail at the contrasts between prime property markets in the world’s two largest economies

MARKET¯BY¯MARKET INSIGHT Knight Frank’s regional experts round up their markets and offer their recommendations for 2010

China

PRIMEPROPERTYPRICESINCREASEDBYOvER50%INSHANGHAILASTYEAR,BUTCHINAISSAFEFROMSPECULATIvEBUBBLES,ATLEASTFORNOW,ARGUESxAVIER WONG,KNIGHTFRANK'SHEADOFRESEARCHFORGREATERCHINAANDHONGKONG

AnoverwhelmingmajorityofhomeownersinChinahaveprofitedfromthehousingreformthatbeganin1998whenthecountry’sresidentialsectorwasprivatised.Infact,inthepasttenyears,housepriceshaveconsistentlysoared,exceptforashortrespiteinlate2007and2008.Inmanycities,valueshaveincreasedmorethanthreefoldinthepastdecade,onthebackofstrongeconomicandincomegrowth. SuchpositiveinvestmentexperienceshavemadethehousingmarketasurebetformostMainlandChinese,especiallysincethelocalstockmarketiswellknownforitsvolatilityandtherearerestrictionsonoutboundinvestments. Thecountry’ssurgingproductivityandhighsavingsratealsomeanthatincreasingnumbersofMainlandChinesecanaffordrelativelyexpensiveproperty.China’snationalsavingsratetotalled52%ofGDPin2008,accordingtostatisticsfromtheAsianDevelopmentBank.AccordingtoarecentsurveyconductedinBeijinginthefirsthalfof2009,about30%ofhomebuyersdidnotrequireamortgagetopurchaseproperty.ManyindigenousinhabitantsinChina’skeycities,afterhavingpurchasedtheirownhome,acquiredsecondandthirdresidentialpropertiestoleasetomigrantsfromotherprovincesandcities. TheofficialmeasuresofaffordabilityinMainlandChinaunderstatetherealpositionasincomesareoftenartificiallyloweredfortaxpurposes. DespiterapidpricegrowthinChina,affordabilitymeasuresshouldgenerallybehealthierthanintheWest,consideringChinesehomebuyers’highsavingsrateandrapidincomegrowth.Manyyoungpeople–beingtheonlychildintheirfamily–alsoreceivelargeamountsofsubsidiesfromtheirparentsforhomepurchases.Chinesecitizens’highrateofsavingsandtheirfixationwithinvestinginbricksandmortarmaymeanthatChina’spropertymarketupcyclelastslongerthanthoseintheWest.Myconcernisnotthatweareindangerofanunsustainablebubbleintheshortterm,butthattherecouldbeagrowingthreatin,say,threetofouryears’timeifhomepricescontinuetosurge–thiswillbewhenthemarketisreallytested.

US

THEPRIMENEWYORKMARKET,WHEREPRICESFELL12.5%IN2009,ISGAININGSTRENGTH,BUTTHERECOvERYISTENTATIvE,SAYSLEADINGNEWYORKPROPERTYCOMMENTATORjONATHAN MILLER

ThefrozenmarketinManhattaninthefirsthalfof2009gavewaytoamuchstrongersecondhalfoftheyear.Bythesummer,themarketbegantoseearecoveryinsalesactivityfollowinganimprovementineconomicconfidencepromptedbyarevivalinthestockmarket. Whilethemarkethasundoubtedlyimprovedcomparedwithlastyear,weoughtnottogettooexcited.Therecoveryoflate2009wasashort-termuptick,dueinlargeparttoareleaseinpent-updemand.Myviewisthatthesurgeindemandisnotthestartofarisinghousingmarket.Whilesalesareupsharply,priceshavemoved“sideways.” IhavesomelingeringconcernsfortheNewYorkmarketin2010.Themarkethasbeenaidedbygovernmentstimulusmeasures–taxcreditsforfirsttimebuyers,inparticular.Thispackagewillexpireinmid-2010.WhiletheUSeconomyisgrowing,thehighrateofunemployment–around10%andsomewhathigherlocally–aswellasatightmortgagelendingenvironmentdonotprovideafirmbasisforongoinggrowthinhouseprices. Arealfearfor2010isrisingmortgagerates,currentlyatnearrecordlows.Thepotentialforgrowingforeclosures,whichwerenotaproblemin2009,isanotherrealfactor. Onesegmentofthemarketthathasseenanoticeableuptickhasbeeninternationaldemand,wheretheweakdollarhaspromptedinterestfromAsia,EuropeandSouthAmerica.DemandfromSouthKoreahasalsobecomemorenoticeable. LookingoutsideNewYork,bothBostonandWashingtonDChavealsoimproved,withrisingresalevolumesinbothmarkets.OnLongIsland,theHamptonsluxurysecondhomemarkethassurprisedeveryonewithitsresiliencetodate.Asadiscretionarymarket,therewasgeneralconcernthatthisregionwouldseelargedeclinesinpricesandsalesfromthe2008andearly-2009marketturmoil.Infact,bothsalesandpricetrendshaveremainedinlinewiththeManhattanmarket. Jonathan Miller is CEO of Miller Samuel Real Estate Appraisers, which provides market research for Prudential Douglas Elliman, Knight Frank’s New York associate.

Prime Italy

RUPERT FAWCETT –HEADOFITALIANDESKThemarketinItalyhasremainedrelativelyrobustoverthepastyear.Priceshavefallen,butnottotheextentofothermarkets.Italyremainsalong-termlifestyle-drivensecondhomemarketratherthanashorter-terminvestment-drivenone. TherehasbeenanincreaseinItalianbuyersandthosefromotherEuropeancountriestakingadvantageoflowerprices,whilesterlinganddollardenominationbuyersaremorecautiousduetotheswinginexchangerates.Theearlysignsfor2010arethatsalesvolumesarebeginningtoriseonthebackofgreaterconfidence. Ibelievethereareconsiderableopportunitiesfromtwoparticularmarkets.First,Chiantiasbuyersreverttotrustedmarkets.Second,venice.RentalreturnsinItalyareneverespeciallyhigh,butveniceprovidesagoodyear-roundrentalmarket.

Luxury New¯Build Resorts

jAMES PRICE–HEADOFINTERNATIONALRESIDENTIALDEvELOPMENTThenew-buildresortmarketwasoneofthesectorsmostaffectedbythemarketdownturn.Ourestimatesarethatthecompletionofnew-buildresortaccommodationfellby65%betweenthe2007propertypeakand2009inEuropeandtheCaribbean. Buyersandfinancebothdisappearedin2008andleftmanydevelopmentsstalledorcancelled.Theresultisthatwithfewerprojectssurviving,thosewiththestrongestproductofferarenowmorevisiblewithinthemarket. Focusontheverybestprimelocations(Coted’Azur,SwissandItalianLakes,primeTuscanyandwestcoastBarbados).Transactionsmaybedown,butvalueshavenotdroppedsignificantly.Forgrowthpotential,looktolocationswithinternationalinterestandgoodtransportandsupportinginfrastructure.Forexample,Catalunya(Spain),SilverCoast(Portugal)andLigurianCoast(Italy).

Cote D’Azur and Provence

PAUL HUMPHREYS–HEADOFFRENCHDESKInthecoreCoteD’Azurmarketpriceshavecorrected.Despitelowerlevelsofinterestatthestartof2009,thesecondhalfoftheyearwitnessedincreasedactivity(20%to30%higher)fromDutch,Norwegian,Danish,BelgianandRussianpurchasersassistedbylowinterestratesandlowercapitalvalues. Atthetopendthemarketremainsuntested,withtransactionsstillsparse. Inland,Provencesawthere-emergenceofBritishbuyersearlierthantheCoteD’Azur.American,AustralianandParisianbuyerswerealsocompetingforthebestvillas. WhilethewholeoftheCoteD'Azurattractsinternationaldemand,themostrobustfinanciallyhasbeentheStTropezendofthecoast.Arecentplanninglawstatingthatnonewplanningconsentsaretobepermittedwithin300moftheseahassignificantlyrestrictednewsupply.

Switzerland

ALEx KOCH DE GOOREYND–HEADOFSWISSDESKTherehasbeenaconsiderableupliftininterestinSwisspropertyinrecentmonthsfrominternationalhighearnerslookingtoescapemoreoneroustaxationinandaroundEurope.Thisinteresthasbeenslowtoconvertintosolidactivityduetorestrictionsonforeignersbuyingresidentialpropertywithoutthecorrectpermits. ThecentralissueforthenewarrivalsinSwitzerlandhasbeenpropertychoice–orratherlackofit,especiallyinlocationslikevaudandGeneva.Asthelackofavailablepropertyhascometolight,increasinglyithasbeensmallerpropertiesandapartmentsthathavebecomethefocusfordemandfor“taxhomes”. InGenevastronginterestisalreadybeingshowninandaroundCollex-Bossy,versoixandCologny,areas10to15minutesfromthecentreofthecitythatofferarealprospectforimprovementandgentrificationovertime.

Luxury Caribbean

GEORGINA RICHARDS–HEADOFCARIBBEANDESKAttheheightofthemarketbuyerswereacquiringpropertyonthesmallerlesser-knownislands.Theseweremarketsintheirinfancyyettodevelopasubstantialre-salemarket.Thedownturnhasseenareturntoestablishedmarketswithgoodinfrastructureand,wherepossible,directflights. MostpartsoftheCaribbeansawpricefallsinthefirsthalfof2009–20%dropswerenotuncommon.Demandonlyreallybegantoreturninthefinalthreemonthsoftheyear.Establishedsportingestatesandbeach-frontpropertyhaveprovedthemostresilientsector,especiallyintheBarbadosparishesofStJamesandStPeter.OntheBritishvirginIslands,growthindemandforlandandpropertyhasbeenverystrong. Barbados,inparticularthewestcoast,offeropportunitiesin2010.Landandbuildcostsaredown,makingthistheyeartodesignandbuildyourdreamhome.

Prime Alpine Markets

MATTHEW HODDER-WILLIAMS–ALPSTheresortswherepriceshaveadjusted,ChamonixandthelowervillagesofCourchevel,forexample,haveseenrenewedactivity.ReductionsinChamonixhavemeantthattherehasbeenrenewedsalesactivityforwell-locatedapartments,especiallybetween€500,000and€750,000. TherehasbeenincreasedevidenceofbuyerdemandincoreareaslikeCourchevel,Meribel,Megeve,Chamonixandvald'Isere.High-budgetpurchasers(€10m+)appearedattheendof2009andwerejoinedinJanuary2010bythoselookinginthe€500,000to€1.5mmark. Askingpricesinprimelocationshavebeengenerallystableastherehavebeenfewforcedsalesinthepasttwoyears.Activityintheseprimeareas,Courchevel1850andLesCaratsinvald'Isere,forexample,hasbeenlimited. EitherlookforanapartmentinChamonix,orasmallchaletintheTroisvallees.

|KNIGHTFRANK.COMCITIPRIVATEBANK.COM



KNIGHTFRANK.COMCITIPRIVATEBANK.COM 13 }

THE WEALTH REPORT

PROPERTY gUide to inVestments

METAMORPHOSIS

With the love affair betWeen Wealthy

investors and property re eMerGinG,

the Wealth report explores the outlook for investMent in 2010

Mostpropertymarketsexperiencedahorrendoustimeduringthe2008globaleconomiccrash.Thesilverliningforinvestorshasbeenthechancetoreturntomarketsatwhathopefullyrepresentsthelowpointofthecycle. Forcash-richinvestorsultra-lowinterestrateshavemeantbankdepositshavelookeddistinctlyunattractive,whilethelowyieldsonbondsandvolatilityinthestockmarkethavegivenadditionalpauseforthought. Addedtothis,theimpactofthefinancialcrashhasnotbeenashardonthetypicalultra-high-net-worthbuyerofprimeproperty.Thishasmeantthatmanywealthyownersofpropertyareagainlookingforinvestments,saysMichaelMcPartland,managingdirectorandheadofresidentialrealestateatCitiPrivateBank.“Thewealthmarketisrelativelyinsulated.Ourclientslookforopportunitieswheneveryoneelseiscirclingthewagons.Buyingbecomesopportunisticinadownturn,particularlyaspeopleturntohardassetssuchaspropertywhenotherassetsexperiencedislocation.” Howtobuyhasneverbeenmoresophisticated,saysMcPartland:“Thereisamyriadofdirectpropertyinvestmentoptions,fundsandlistedandunlistedcompanies,aswellasmorecomplicatedinstruments,suchasderivatives,nowonoffer.Thisallowsinvestorstobuildupaportfoliospreadoverassetclassesandsectors,aswellasriskandreward.” Whereandwhattobuyareobviouslykeyquestionsgiventhatsomesectorsandsomeregionsarestillseeingpricesmovingdown,whileothershavebouncedsohardthattheyarenearingthevaluesofthe2007boom. Formany,residentialpropertyremainsthemostattractiveinvestment,giventhedynamicsthatunderpinkeycities,suchasLondon,NewYorkandHongKong.Thereisafocusontheveryprimeareas,saysMcPartland,whicharealwaysinshortsupplyandfacingsteadydemandfrombuyersandtenantsinglobalcentresoffinanceandculture. LiamBailey,headofresidentialresearchatKnightFrank,agrees:“Residentialinvestmentmakesalotofsenseoverthelong-term.Inmostlocationssupplyofpropertyeitherkeepspaceorfallsshortofdemand.Mosthigh-net-worthinvestorstendtoclusteraroundthebestlocationsintheworld,whichprovidesitsownsupport.” KeycitiessuchasLondon(pricesup15%inthe10monthsfromMarch2009),andHongKong(upbyaround41%)haveseenasharpbounceinprimevaluessincereachingtheirnadirlastyear,benefitingfromthelimitsonbuilding,growingdemandandsustainedinvestorrequirements.Althoughthiscouldputdownwardspressureonyields,rentsareatlastbeginningtoclimb,addsBailey. Butthereisstilluncertaintyaboutshort-termgrowth,saysBailey,particularlygiventhespeedofrecentgrowth.Hepointstotheuncertaineconomicrecovery,andthepotentialforrisingunemploymentandinterestrates,asrisksforhousepricegrowth.




THE WEALTH REPORT


for Many, residential property reMains the Most attractive investMent, Given the dynaMics that underpin key cities such as london, neW york and honG konG.

“Investorstendtobuyonthebasisofspeculativecapitalgrowth,butyouhavetoaskwherethisislikelytooccurintheshortterm.PricegrowthinsomecentreslikeLondonislikelytobeconstrainedasanelementoftherecoveryhasalreadytakenplacein2009,andthemarketsarestillbeingtradedoffafairlyhighpriceonahistoricalbasis.”

COMMERCIAL MARKETS Manyhigh-net-worthinvestorshavealsoreturnedtocommercialpropertymarkets,giventhenewbuzzaroundthesector,wheretherehasbeenanunexpectedlylargereboundinpricesinthepastsixmonths.Globalinvestmentturnoverreachedalowpointof£37.9bninthefirstquarterof2009beforebouncingto£83.5bnbythefourth,accordingtoRealCapitalAnalytics. Undoubtedly,theUKhasseenthebestoftherecoveryinEurope,andarguablytheworld,ifonlybecausevaluesalmosthalvedintwoyears,amuchbiggerdeclinethaninothermarkets,accordingtoJoeSimpsonofKnightFrank’sCommercialResearchteam. Therehasbeenarapidinfluxofmoneyintothesector,initiallyfromoverseasinvestors,whosawrealestateasespeciallycheapgivenpricesineurosandUSdollarsaretwo-thirdsdownfrompeak.Morerecently,thedomesticinstitutionalbuyershavereturned,withUKinvestorsseeing6%to7%yieldsagainst3%to4%‘risk-free’governmentbondsasattractive,hesays. ThefinalmonthoflastyeardeliveredthelargestmonthlycapitalgrowthinthebenchmarkInvestmentPropertyDatabank’s23-yearhistory,at3%,takinggrowthto8.8%fromitstroughlastsummer,andsufficienttoliftreturnsonUKcommercialpropertyintopositiveterritoryforthecalendaryear,pointsoutSimpson. Theconsensusisthatcapitalvaluesforcommercialpropertywillflatten–apositionsupportedbythepricingofderivativesbeingtraded–withtotalreturnssettlingat8%to10%through2010-2012.

Somerecentanalystnoteshavesuggested,however,thatvaluescoulddipagain,givenuncertainoccupierdemand,inadditiontotheeffectsofreininginquantitativeeasingagain. valuesincontinentalEuropehavehelduprelativelywellcomparedwiththeUKandUS,partlyasrentshavealsonotcorrectedasmuch.Onaverage,Europeancountrieshaveseenfallsofbetween10%and25%frompeak.EstablishedmarketsinGermanyandFrancearetippedasgoodforstable,income-producinginvestment,althoughthosewithahigherriskfocusmayprefermarketssuchasPoland,orevenSpain. PaulCorcoran,directoratCitiPrivateBank,whooverseesthebank’sEMEArealestatelending,saysvaluedclientsarelookingtobuyprimepropertyinareassuchasLondonfortheirlong-terminvestmentportfolios.Headds:“Lendingisgoingtobealittlemoreoldfashionedgoingforward.” WilliamBendernagel,managingdirectorandCitiPrivateBankglobalcommercialrealestateproducthead,saysthatUSrealestatemarketsremaineddepressedgivenalackoftransactionstosparkanyrecovery.Themarkethasfallenbybetween30%and50%fromthepeakin2007,headds,dependingonassetclassandlocation. Hesays:“Tomakeamarket,thereneedstobebuyingandselling.Thelargescaleofrefinancinghaspushedproblemsdowntheline,soatthemomenttheholdersofdistressedpropertiesarenotbeingforcedtodealwiththeirissues.” Thecontinueddeteriorationinfundamentalssuchasrentsandoccupationcouldpressurecashflow,whichwouldthenleadtoashakeoutofthemarket.Manyinvestorsindirectpropertyarewaitinguntilthishappens,headds,whichisunlikelytomanifestuntilthebackendof2010. MrBendernagelpredictsthatthequalityassetsinbusinessdistrictssuchasNewYork,BostonandSanFranciscowillbethefirsttorecover.

Forcommercialinvestorsthequalityofthelocation,buildingandtenantisthemainconsideration,ratherthananyspecificpropertytype.Evenso,suchrequirementshavemeantthatthefocusremainsonmoderncityoffices,particularlyinLondon,Munich,HamburgandParisinEurope.NewYorkandWashingtonintheUS;andthemajorcitiesofAsiasuchasHongKong,SingaporeandShanghai.Inaddition,thereisstronginterestinhigh-endstreetretailandtopregionalshoppingcentres,althoughtherearefewbargainstobehadanylongergiventhereturnofinterestincommercialproperty. QuekKwangMeng,headofrealestateinvestmentsinAsiaPacificforCitiPrivateBank,tipsretailmallsinChina,especiallywherethereisagoodcornerstonetenantlikeTescoorWalMart.HesaysChineseconsumersaremigratingfromstreetmarketstoamoreWesternshoppingmodel. Othersareturningtolesspopularassetclasses,suchassecurelyletdistributioncentres,aswellasnichesectorsincludingstudenthousing,selfstorage,datacentres,retirementhomes,socialhousing,healthcarefacilitiesandinfrastructure.“Green”developmentisgaininginterest,particularlywiththecompulsoryenergyefficiencyratingsbeingintroducedforbuildingsinEurope. JohnStyles,headofinvestmentmanagementatKnightFrank,believesthat2010willbeaninterestingyearforthecommercialpropertyinvestmentmarket:“Thereiscurrentlyalargevolumeofequitychasingprimeassetswhichareinlimitedsupply,”hesays. OneofthekeyissuesforStylesisthatitistheactionsofthebanksthatwilldeterminehowmuchnewstockisreleasedtothemarkettomeetthisdemand.“Initialindicationsarethatthereismorestockcomingviathisroute,”hecomments.

TOTALNAREITRETURNSSource:CitiPrivateBank

JAN

00

FEB

01

FEB

02

FEB

03

FEB

04

FEB

05

FEB

06

FEB

07

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08

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FEB

10

45040035030025020015010050

Index(100=Jan31,2000)

AMOUNTINvESTEDINPROPERTYSource:KnightFrankResearch,RealCapitalAnalytics

Total

Americas

EMEA

AsiaPacific

07Q

1

07Q

2

07Q

3

07Q

4

08Q

1

08Q

2

08Q

3

08Q

4

09Q

1

09Q

2

09Q

3

09Q

4

350

300

250

200

150

100

50

(US$bn)

SELECTEDPRIMEOFFICEYIELDS–Q42009Source:KnightFrankResearch

876543210

LON

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ITY

LON

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END

MAD

RID

FRAN

KFU

RT

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IS

AMST

ERD

AM

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YO

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SYD

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HO

NG

KO

NG

SIN

GAP

OR

E

(%)




THE WEALTH REPORT


Shariainvestmenthasbeengrowingfastoverthepastdecade,althoughthisexpansionplateauedduringthepasttwoyearsofeconomicdownturn.AccordingtoCitiPrivateBank,Shariacompliantassetsundermanagementacrossallclassesexpandedrapidlyfrom$23bnin2003/04acrossabout400fundsto$41bnin2007/08across700funds. Sincethen,themarkethasonlygrownto$44bninvestedinfundformat.Intotal,however,totalassetsinallshapesandformscaredforIslamicallyhavegrowntonearlyatrilliondollarsasoflastyear,saysYoussefAffany,managingdirectorandseniorrelationshipmanageratCitiPrivateBank. Whencomparedwiththetrillionsofdollarsbeinginvestedthroughconventionalfunds,andthesizeoftheworld’sMuslimpopulation,thismeansthatthereisconsiderablegrowthpotentialinthesector,saysAffany.Atitscore,ShariaapprovedinvestmentcomesdowntoadheringtothereligiousrulesassetoutintheKoran.Mostobviously,theseprecludeinvestinginareassuchasalcohol,arms,drugs,gambling,pornographyandpork.Therearealsorulesovertheuseofdebtandinterestoninvestments,heexplains. Thetheorybehindtherulesisveryclear,butthepracticalimplementationhasprovenmorevaried.Thisisinpartbecauseinvestmenthousesneedtoapplytoaboardofscholars,whowillstudyandthenapproveagivenproduct.Indoingso,theycallonknowledgebothofinvestmentsandinSharialawand,hence,inevitablyengageinsomelevelofinterpretationofthetheologicalrules.Asaresult,

RealestateisaparticularlyhotareaforIslamicfinance,giventhestronginterestinpropertyamongmanyMuslimcountries.Themarketisstillatafledglingstage,however,withagulfbetweenthecleartheorybehindIslamicinvestmentinrealestateandthedifficultiesattachedtoprovidingtheappropriatetoolsandframeworkforefficientimplementation.

17 |

ISLAMIC INVESTMENT IS A GROWING AREA OF INTEREST FOR CORPORATE FINANCIERS GIVEN THE HUGE POTENTIAL GROWTH AMONG THE MUSLIM POPULATIONS AROUND THE GLOBE. THE WEALTH REPORT INVESTIGATES

ISLAMIC FINANCING FOR REAL ESTATE

THE WEALTH REPORT

PROPERTY sharia inVestments

INDIRECT INVESTMENT OPPORTUNITIES Oneproblemwithinvestingdirectlyinpropertyistheilliquidityofthemarket,saysMichaelBilerman,headofrealestateandlodgingatCitiInvestmentResearchandAnalysis.“Thepublicmarketprovidesimmediateliquiditytothosewhowanttosellandalsotothosethatwanttoparticipateinthereboundincommercialrealestate.” RealEstateInvestmentTrusts(REITs),whicharebasicallycompaniesthatbuy,developandholdincomeproducingproperties,areaneasyalternativeforinvestorstogainexposuretothecommercialrealestatemarket,saysBilerman.“Theyaretaxefficientandhavetodistributemuchoftheirincomeasdividends–generallyaminimumof90%–toshareholders.Theyarealsoprofessionallymanaged,offeringconsiderableliquidity,transparencyanddiversificationbenefits.” GlobalREITshadabroadlysuccessfulyearin2009,risingalongwiththegeneralmarketafteralargeslidefrompeakvaluations,demonstratingaccesstocapital–grantedatasignificantdilutivecost.Anumberofcompaniesaroundtheworldpursuedemergencyrightsissues,primaryequityofferingsandassetssalestoraisenewequitytode-leverage.Morethan$22bnofcommonequitywasraisedintheUS,morethan£7bnintheUKandmorethanAU$13.2bninAustralia,saysBilerman.

Themarkethasralliedmorethan100%sinceMarch,hesays,takingthesector’sequitymarketcapitalizationfromatroughvalueofabout$100bntoabout$230bntoday.Buttherearestillattractiveopportunities,hesays,particularlybychoosingstockscarefully. ThishasmeantthattheREITsectorisgenerallyinafarmorerobuststatethanlastyearandversustheprivatemarket.Withcapitalvaluesbackontherise,thereisreasontoseefurthersharegrowthdespitethehigherprices. Bilermansays:“Thepublicrealestatesectorhasshowntremendousstrengthcomparedwiththeprivaterealestatemarket.Stockselectionwillbekeytodrivingexcessreturns.REITsweatheredaseriousstorminlate2008andearly2009andcameoutstronger.Theyarenowbeingearmarkedasthesolutionratherthantheproblemtoissueswithinthecommercialrealestatearena.TheREITmodelisheretostay.” Therearealsootherindirectwaystoinvestinproperty,mostobviouslythroughafundstructure.Thesehavegenerallyhadaverydifficulttimeduringthepasttwoyears,withthehighleveragecarriedinmanyvehicles,butmanymanagersareonceagainlaunchingfundsinthehopeoftappingintoarecoveryandbuyinggoodlower-pricedstock.McPartlandsaysthatmanywealthyclientspreferto

exploretheuseofequitystakesinpartnerships,orfundingacompanydirectly,ratherthanpayinglargefeesandrelyingonmanagerstoinvestontheirbehalf. Tradinginpropertyderivatives–whicharefinancialproductswhosevalueisderivedfromthevalueofanunderlyingrealestateasset–isalsostartingtogrowagain.TheUKisstillbyfarthemostmaturemarket,accountingforthemajorityofthe£762mworthofcontractsmadegloballyinthethirdquarterof2009. RichardWhite,apartneratKnightFrank,whospecialisesinpropertyderivatives,saysthattheyprovideinvestorswithanefficientmeansofinvestingagainstcommercialproperty,avoidingfrictionalcostssuchasstampduty,feesandmanagement. “Addtothisthefactthattraditionallycommercialpropertymarketinvestorsrequireaminimumof£50mtobuildadiversifiedportfoliowithinthesector–derivativesprovidethatspreadforaslittleas£1m,”hesays. Propertyreallyisaveryversatileandtangibleinvestment,concludesBailey.“Ithinkthatiswhypeoplefromallwalksoflifeliketoinvestinitsomuch.Aswithanyrelationshipthereareupsanddowns,andsometimesthingsdon’tworkout,butitwillalwaysremainakeypartofmanyHNWIs’investmentportfolios.”

CentralLondon

Manhattan

HongKong

PRIME RESIDENTIAL YIELDSSource: Knight Frank, Miller Samuel and Prudential Douglas Elliman

8

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0

DEC 00 DEC 01 DEC 02 DEC 03 DEC 04 DEC 05 DEC 07DEC 06 DEC 08 DEC 09

whileallagreeaboutthecorerules,theinterpretationsand,therefore,theend-resultmightdifferfromonegroupofscholarstoanother. “Thismarketisstillatanembryonicstage.Theissueshavebeenlargelyovercomeatatheoreticallevel,butnotnecessarilyatapracticallevel,certainlynotsufficientlyattheimplementationstage,”saysAffany,whopointstothisasthereasonthatrealestateinvestmenthasnotgrownasfastasequitiesandfixed-incomeproductstodate. Headds:“You have pockets of excellence and pioneering investors in a number of countries such as Saudi, bahrain, UAE, Malaysia and Pakistan, which should gradually spread elsewhere.” Someboardsarestricterthanothers,withthecentresofreligiousthoughtseenashavingamorerefinedapproachthanelsewhere.Toagreatextent,thelevelofcomfortofinvestorsintheIslamiccredentialsofagivenfunddependonthereputationofthescholarsintheShariaboardthatapprovedit. Forexample,inarealestatecontext,thiscanmeanthatinvestmentinabar,orabettingshop,willnotbeallowed,althoughtherecouldbeagreyareaaboutwhetherornotbuyingabuildingonlypartlylettoarestrictedtenantwouldbeacceptable. Therearealsosolutions,forexample,givingincomefromanon-compliantassetpartofalargerofficebuildingtoanIslamiccharity.Thisconceptiscalled"revenuecleansing".Itisoftenappliedtodividendsfromlargemulti-disciplinarybusinesseswherethevastmajorityisIslamiccompatible,butasmallportionmightnotbe. Theuseofdebtininvestmentscanalsobeagreyarea,withsomestricterapplicationoftherulesforbiddingalluseofdebttomorebroadperspectivesallowinguptoathirdofdebttoequityused. JamesLewis,partnerinKnightFrank’sBahraincapitalmarketsteam,givestheexampleoftheCityofLondon,whereareastoavoidcouldincludebuildingsoccupiedbyretailbankingtenants,whileinsuranceormerchantbankingisgenerallyperceivedasacceptable. LewisisalsosurethattheShariacompliantinvestmentmarketissetforrapidexpansion.HesaysthatmanyinvestorsintheMiddleEastareactiveatpresentlookingfortrophyassetsinmajorcitiessuchasLondon.“AlmostallofthepeoplewanttofocusonLondon,generallyeithertheWestEndortheCity.ThereisanaffinitywithLondon.” Evenfornon-Muslims,itseemsathoroughunderstandingofthetheorybehindIslamicinvestmentscouldbeanincreasinglyimportantdeal-makingtoolthisdecade.

(%)




THE WEALTH REPORT

PROPERTY sPeCial FoCUs on asia PaCiFiC

Property,alongwithgold,isoneofthemostpopularinvestmentsinAsiaPacific,accordingtoQuekKwangMeng,headofrealestateinvestmentsintheregionforCitiPrivateBank.“Peoplelovehardassets.”InChina,forexample,anewlymarriedcouplewillbuygoldthen,oncetheyhavesavedenough,ahouse.Afterthatthey

willmaybeconsiderlookingatotherlesstangibleinvestmentssuchasequities,saysQuek. ThisviewisechoedbyCliveBetts,Singapore-basedheadofKnightFrank’sAsiaPacificregion.“It’swhyweseesomanyopportunitiesacrosstheregion.We’vejustopenedofficesinSouthKoreaandvietnamandarelookingatothercountriesaswell.” Whenyoucombinethisdesiretoownandinvestinpropertywithsomeoftheworld’sfastest-growingeconomies–predictedGDPgrowthfor2010putstheWesttoshame–itiseasytoseewhyprimepropertymarketshavegainedsuchmomentumintheAsiaPacificregion.SomeofthemostexpensivepropertiesinHongKong,Singaporeand,increasinglyShanghai,areapproachingthelevelsseenincitieslikeLondonandNewYork.

EveninCambodia,wheretheaverageincomeisonlyUS$600peryear,accordingtotheWorldBank,speculationhaspusheduppricesfarhigherthanwouldbeexpected. Ofcourse,youcan’twriteaboutanymarketinAsiaPacificwithouttalkingabouttheinfluenceofChina.When,forexample,Beijingputthebrakesonbanklendingearlierthisyearinresponsetoconcernsthatassetbubblesmaybedeveloping,sharesinAustraliannaturalresourcecompaniesfellimmediately. China’spowercanbeepitomisednotjustbyitsphenomenalGDPgrowth–almost11%inthefinalquarterof2009–butbytheimpactofitsresponsetothecreditcrunch.Chinaputinplaceanaggressivemulti-trillionyuanfinancialstimuluspackageand,whileUSandEuropeanmeasureshelpedrescuetheirdomesticeconomies,muchofthisextraChineseliquiditywasinvestedinassetsoverseas,includingAsiaPacificpropertymarkets. “Chinaisincreasinglyasourceofcapitalintheregion,”confirmsJohannaChua,chiefeconomistAsiaPacificforCitiInvestmentResearchandAnalysis. AlthoughsomecommentatorsnowquestionthesustainabilityofChina’seconomicgrowth,Chuabelievesitseconomicfundamentalsarestrongenoughforthetrendtocontinue.“BytheendofthedecadeChina’seconomycouldbe80%thesizeoftheUS’s.” Notallprimemarketsintheregionarerecoveringatthesamepace,butwithaneconomyasbigasChina’sattheheartoftheregion,theAsiaPacificprimepropertystorylookssettocontinue.

PRIME PROPERTY MARKETS IN THE ASIA PACIFIC REGION ExPERIENCED ASTONISHING PRICE MOVEMENTS IN THE PAST DECADE. ANDREW SHIRLEY, EDITOR OF THE WEALTH REPORT, LOOKS AT THE CURRENT SITUATION IN SOME OF THE REGION’S DEVELOPED AND FLEDGLING ECONOMIESASIA

IN BLOOM

ASIA IN

BLOOM ASIA PACIFIC PRIME PROPERTY PRICE CHANGES PRIMEPROPERTY% FORECASTPRIME PRICECHANGESINCE PROPERTY%PRICECOUNTRY ECONOMICCRISIS CHANGEIN2010

AUSTRALIA -10to-15 5to10

CAMbODIA -40 0to10

CHINA 20 -10to10

HONG KONG -6 15to18

INDIA -15to-20 12to15

INDONESIA -15to-20 5

MALAYSIA -10to-15 5to10

SINGAPORE -15to-20 10to20

THAILAND 5 5to10

VIETNAM -5to-10 5to10

Source:KnightFrankregionaloffices



CAMBODIA CHINASINGAPORE THAILAND VIETNAM INDIA MALAYSIA INDONESIAHONG KONG AUSTRALIA

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2 CAMBODIA CHINASINGAPORE THAILAND VIETNAM INDIA MALAYSIA INDONESIAHONG KONG AUSTRALIA

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46


Vietnamvietnamhasanestablishedtop-endapartmentmarketinitscapitalHanoiandalsoitsmaincommercialcentreHoChiMinhCity.Anumberofluxurybeach-frontdevelopmentsareopeningalongChinaBeachinDanang. Realestateisapopularinvestmentwiththevietnamesewhoarenotallowedtoinvestoverseasandpreferhardassetclasses,saysJohnGallander,headofKnightFrank’snewlyopenedofficeinHanoi.“Buyingtop-endcondominiumsandlettingthemtoex-patsisapopularinvestment,althoughitisnotaverydeepmarket.InHanoi,forexample,therearemaybeonlyadozenhigh-qualityservicedapartmentdevelopmentsof150unitsorlarger.”

MostprimedevelopmentsinHanoiareinandaroundtheHoanKiemDistrictintheCBD,andseveralnewluxuryvillaandapartmentdevelopmentsareunderwayatMyDinh,sevenkilometresfromthecentre. Thisrestrictedsupplymeanttheprimemarketwaslessaffectedbyvietnam’srecessionandaperiodofrapidlyrisinginflationin2008,saysGallander.Pricesstartedtorecoverinthesecondhalfof2009,butarestillabout5%to10%belowtheirpeak.PricesinHoChiMinhCitycanbemorevolatile,becauseofextrasupply,headds. InDanang,askingpricesforluxuryvillascanreach$2m.Itisasmallbutgrowingmarket,saysGallander.

PRIME VIETNAMESE PROPERTY PRICESLOCATION US$

A-GRADEAPARTMENTSAvERAGEPRICEDISTRICT1HCMC 3,770Sqm

THEMANORvILLAS,MYDINH,HANOI 2,500Sqm

HYATTRESIDENCEvILLAS,DANANG(TOTALPRICE) 1.5-2million

21 }

THE WEALTH REPORT


thailandThereisaclearcityandseasplitbetweenThailand’sprimepropertymarkets.Bangkokremainstheonlycityinthecountrytohaveadevelopedurbanluxurymarket,whilePhuketislandisstilltheplacetogoifyouarelookingfortrulytop-endholidayvillas. Bangkok’sprimemarketisfocusedonluxurycondominiumsclusteredeitheraroundtheCBDoronsectionsofstreetslikeSukhumvitRoad.However,thehighpriceoflandmeansthattheexclusivesuburbsofSukhumvitandPhaholyothinandalongEkamai-RamindraRoadarealsoemerging,withaccommodationinsingledetachedhousesandtownhousesaswellascondominiums,saysPhanomKanjanatheimthao,managingdirectorofKnightFrankThailand. ForeigninvestmentintoThairealestateisrestrictedwhenitcomestolandpurchasingand2009wasnotaverygoodyearfortheprimemarkets,hesays.Developers,however,havesofarbeenabletorideoutthedownturn,causedbydomesticpoliticalinstabilityaswellastheglobalrecession,withoutcuttingpricessignificantly.Kanjanatheimthaosaysthisisbecausemanynewdevelopmentswereupto80%pre-soldbeforetheworstoftheeconomicproblemsstruckandothernewprojectshavebeenputonhold.

Coastalresorts,suchasKohSamuiandfurtherflungislands,havetriedtodevelopaluxuryvillamarkettomatchPhuket’s,butnonehavereallybeenthatsuccessful,saysFrankKhan,headofresidentialforKnightFrankThailand.“Therehaveeitherbeenissueswithlandownershiportheinfrastructuressimplyhaven’tbeengoodenough.Peoplespendingmillionsonavillagenerallydon’twanttobetooisolatedincaseanythinghappenslikeamedicalemergency,”heexplains. Phuket’swestcoastistheisland’spreferredlocationattractingpeoplefromaroundtheworld.Themostexclusivevillascancostupto150mBaht(aroundUS$4.5m),althoughveryfewunitsweresoldin2009,saysKhan. ThePhuketandBangkokprimemarketsareexpectedtogaingroundin2010asthecountry’seconomyrecovers.

PRIME PROPERTY DEVELOPMENTS IN THAILANDLOCATION AVERAGE PRICE

BANGKOKPREMIUM BT176,000SqmCONDOMINIUMS (US$5,333Sqm)

PHUKETLUxURYvILLAS(TOTALPRICE) BT108M(US$3.3million)

hong KongTheprimepropertymarketinHongKongtendstobeparticularlyvolatileasthereisnocapitalcontrolanditissusceptibletotheshocksofunexpectedflowsofinternationalcapital.ForeigninvestorsareincreasinglycomingfromMainlandChina,accountingforabout10%oftotalsalesandupto30%insomenewprimedevelopments,accordingtoxavierWong,KnightFrank’sheadofresearchforGreaterChinaandHongKong. Luxuryresidentialpriceshaverisenbyover40%sincehittingatroughinDecember2008,drivenbyahugeChinesefinancialstimuluspackage,lowinterestratesandthegeneraleconomicrecovery,saysWong.ThenumberofluxurysalesworthoverHK$10mroseby45%lastyear,headds. Limitedsupplyofnewstockandcontinuinglowinterestratesshouldmeanthemarketcontinuestorisethrough2010,hepredicts.Luxuryrentsarealsoforecasttoriseby15%thisyearandcouldhelppushuppricesbyasimilaramount.DownsidescouldbeaclampdownoncapitalflowsfromMainlandChinaandinterestraterisesintheUSthatcoulddampenconsumerdemandforChinesegoods.

ThetraditionalprimeresidentialareasofHongKongincludeThePeak,IslandSouth,Happyvalley,Jardine’sLookout,Pokfulam,KowloonTongandHoManTin.KowloonStationandTsimShaTsuiareemergingasprimeareasforluxuryapartments. TheimpactofChinesedemandcouldalsoboostotherpropertysectors,saysWong.Furtherliberalisationofcross-bordertravelbetweenHongKongandmainlandcitieslikeShenzhen,forexample,shouldbegoodforretailinvestments.

TYPICAL PROPERTY PRICESLOCATION HK$ Sq ft (US$ Sq m)

PEAK 20,395(28,145)

ISLANDSOUTH 18,521(25,559)

MID-LEvELS 15,181(20,950)

HAPPYvALLEY/JARDINE’SLOOKOUT 14,566(20,101)

POKFULAM 15,195(20,969)

ChinaChinesehousingstatisticsmakeincrediblereading.In2009astaggering8.5millionnewresidentialunitsweresold,comparedwithabout500,000intheUS.Lastyear,theaveragepricesofnewhomesinurbanShanghai,BeijingandShenzhenincreasedby87%,63%and66%,respectively.Thisgrowthwasdrivenbylooselendingpoliciesandamassivegovernmentfiscalstimuluspackage. xavierWong,KnightFrank’sheadofresearchforGreaterChinaandHongKong,saysbytheendof2009,priceshadalreadysurpassedtheirpeaksofthepreviousupturnbeforetheoutbreakoftherecentglobalfinancialcrisisbysubstantialamounts. ShanghaihascomfortablyChina’sbiggestprimeresidentialmarketwith8,438newunitsworthoverRMB5m(US$735,000)soldover2009,followedby8,058inBeijingand2,309inShenzhen.Asaproportionoftotalsales,thistop-endbracketaccountedfor5.5%ofdealsinShanghaiagainstamoremodest4.6%inBeijingand3.6%inShenzhen.Guangzhouhadthefourthhighestluxurysalesat1,618units,buttheproportionwasonly1.6%,slightlylowerthanHangzhou’s1.7%,accordingtoareportjointlypublishedbyKnightFrankandHoldways.

AccordingtoWong,uptohalfofluxurypropertysalesinShanghaiaretoforeignbuyers,includingthosefromHongKong,TaiwanandMacau.ThosewhohavelivedinChinaforoveroneyearareallowedtopurchasepropertyinthecountry. Predictinggrowthin2010isdifficult,saysWong,becausethegovernmentisstartingtotakemeasurestocurbexcessivehousepriceinflationandthiscoulddampendemand.Predictedstrongeconomicgrowthandlimitedstock,however,shouldkeeppricesstable,hesays.

MOST ExPENSIVE NEW DEVELOPMENTS IN CHINA (DEC 2009)LOCATION RMb Sq m (US$ Sq m)

SHANGHAI 136,738(20,108)

SHENzHEN 123,389(18,145)

BEIJING 72,413(10,649)

GUANGzHOU 35,925(5,283)

regionandboostprimepropertymarketsinthevicinitywiththeeffectgraduallyripplingouttootherprimeareasofthecity.MarinaBayandSentosa,wherethefirstoftheseresortsareduetoopen,shouldstarttobenefitthisyear,hepredicts.

“TheopeningoftheIRswillpresentmoreleasingopportunitiesforhigh-endresidentialpropertiesandwillhelpcreatenewresidentialenclaves,strengtheningtheoveralllivingexperienceofthesenewclusters,”saysOw.

PRIME SINGAPORE DISTRICTSLOCATION S$ Sq ft (US$ Sq m)

ORCHARDDISTRICT 2,500-3,500 (19,221-26,910)

MARINABAY/SENTOSA 1,800-2,500 (13,839-19,221)

SingaporeLastyearsawadramaticrecoverybytheSingaporeresidentialmarket,butthiswasdriveninitiallybythemassmarketanditwasonlytowardstheendof2009thatprimemarketsstartedtofollow.AccordingtoPeterOw,headofKnightFrankSingapore’sresidentialdivision,thepriceoftop-endresidentialpropertyended2009still15%to20%downfromthepeakseenattheendof2007. Becauseofthis,Owforecaststhatthereisthepotentialforprimepricestoclimbafurther10%to20%thisyearandoutperformtheoverallmarket,whichthegovernmenthastakenmeasurestocooldown. Muchoftheincreaseddemandforprimepropertieshascomefromabroad,saysOw,withmanybuyersfromChina,IndonesiaandIndia.TheCity’sDistricts9,10and11,whichincludetheOrchardRoadarea,willremainthefocalpointforprimeproperty,buttheMarinaBayandSentosaareasarestartingtogainprominence. OwsaystheimminentopeningofgiantIntegratedResorts(IRs),whichcombineluxuryhotels,casinosandentertainmentcomplexes,willattractmorevisitorsfromtherestofthe

KEY LOCATIONS1.HAPPYvALLEY2.POKFULAM

KEY LOCATIONS1.MARINABAY2.ORCHADDISTRICT

KEY LOCATIONS1.HANOI2.DANANG3.HOCHIMINHCITY

KEY LOCATIONS1.BANGKOK2.PHUKET

KEY LOCATIONS1.BEIJING2.SHANGHAI3.GUANGzHOU4.SHENzHEN




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46


THE WEALTH REPORT


indiaIndia’sprimepropertymarketisbeinginexorablydrivenbydemographicchange.AccordingtotheNationalCouncilofAppliedEconomicResearch,thenumberofhouseholdsdescribedas“rich”willhaverisenfrom3min2003to11mby2013.Meanwhile,thenumberofmiddleclass“aspirers”ispredictedtoleapevenmoredramatically,from46mto124m. “ThenumberofHNWIsinIndiaisgrowingat20%ayear,secondonlytoSingapore,”saysPranabDatta,headofKnightFrankIndia.ForeignresidentsarenotpermittedtoownpropertyinIndia,butthisruledoesnotapplytothehugecommunityofwealthynon-residentIndian’slivingoverseas,manyofwhomarealsokeentoinvestbackhome,hepointsout. AlthoughtherearegrowingprimemarketsineveryIndiancity,southMumbaiandsouthNewDelhiarestillfaraheadintermsofprices,withBangalore,ChennaiandHyderabadthenearestchallengers,saysAnandNarayayan,headofresidentialsalesforKnightFrankIndia.

Afterfallingby20%to25%in2008,pricesatthetopendoftheDelhiandMumbaimarketsareexpectedtoreturntopeaklevelsthisyearaspeopletakeadvantageofeasyaccesstocredit,saysNarayayan.DevelopersarerespondingwithaslewofnewprojectsthatcouldleadtoanoversupplyinMumbai.“Atthemomentthereisonlyone60-storeybuildinginthecity,butthereareplansfor10more.” Whenmarketsareboomingdevelopersrushtosupplythemoreprofitabletopendofthemarket,whenthebiggeststoryisreallythehugedemandforaffordablehousingfrommiddle-incomefamilies,saysDatta.“Weestimate2mhousesareneededby2011–apotentialmarketofUS$66bn.” Intermsofluxuryholidayhomes,Goawastraditionallythefavoureddestination,butmanyrichMumbairesidentsarenowbuyingseasidepropertiesintheresortofAlibagtwoandahalfhoursdrivesouthofthecityora15-minutehopbyspeedboat.Five-acrepropertiescancostuptoUS$8mtoUS$10m,saysNarayayan.

TYPICAL MUMBAI PROPERTY PRICESLOCATION RUPEES Sq ft (US$ Sq m)

NAPEANSEAROAD, 50,000-80,000MALABARHILL (11,574-18,519)

WORLI,LOWERPAREL 25,000-40,000(UPANDCOMING) (5,787-9,259)

indoneSiaIndonesiahastwomainprimepropertymarkets–top-endhousesandapartmentsinthenation’scapitalJakartaandluxuryholidayvillasonBali,theonlyHinduislandinthispredominantlyMuslimarchipelago. Despitestrongeconomicgrowth,neithermarkethasexperiencedthehugepriceswingsthathavebeenseeninothercountriesintheregion,saysFakkyHidayat,headofresearchforKnightFrankIndonesia.Thisispartlybecausepropertyownershipislimitedtolocalresidents,althoughthiscouldberelaxedinthefuture.

Eventhoughdemandiscurrentlywelldown,withIndonesianspreferringtoputtheirmoneyintootherinvestments,Hidayatsaysitisverydifficulttofindsignificantpricereductionsadvertised.Althoughdeveloperswillofferprospectivepurchaserssomeincentivestobuy,themajoritywouldratherholdoutforanupturninthemarket,althoughthemarketisexpectedtostaysoftinthefirsthalfof2010,hesays.“Nonewcompletedprojectswerehandedoverinthesecondhalfof2009.” InBali,demandhasbeenhithardbytheglobaleconomiccrisisasmostbuyers–usinglocalnomineesorright-to-useleases–areoverseasexpatriateslivinginAsia.Despitethis,afive-villadevelopmentwaslaunchedbyBulgariResidenceslastautumnwithpricesrangingfromUS$6mtoUS$9m.Again,askingpriceshavenotbeenreduced,butHidayat,saysincentivesareavailable.“NowisprobablyagoodtimetobuyonBali.”Pricescouldpickupby2011,hepredicts.

PRIME JAKARTA PROPERTY PRICESLOCATION PRICE

1000SQMPROPERTYMENTENGDISTRICT US$2.5-5m

LUxURYAPARTMENTSINCBD RP22mSqm (US$2,366mSqm)

malaYSiaMalaysia’sprimepropertymarketismainlylimitedtothecapitalKualaLumpur,althoughthereareseveralfledglinghigh-endholidayhomeprojectsunderdevelopmentinPeninsularMalaysiaandEastMalaysia.

DespitetherebeingnorestrictionsonforeignersowningpropertyworthoverRM500,000,theprimemarkethasnotseenthekindofrecoveryexperiencedbySingaporeorHongKongasyet,saysEricOoi,headofKnightFrankMalaysia.Pricesinthemostsought-aftercondominiumdevelopmentsinKualaLumpurCityCentre(KLCC)probablypickedupby10%lastyearafterfalling15%to20%in2008. OoisaysdevelopersdeferredlaunchingnewprojectsinKualaLumpurlastyearbecausetheywerenotconfidentof50%salesatlaunchandalsobecauseoftheoncomingstockofcompletedunits.Atthesametime,theoverseasinvestorswhomakeuphalfofbuyersinKLCChavelimitedstocktotemptthem,althoughlevelsareslowlybuilding.“ThemarketcouldgetbusierafterChineseNewYearinMarchorApril.”There-imposed5%capitalgainstax,althoughadamper,isnotexpectedtodiscouragemostinvestors,headded. About20minutesfromthecentreoftown,MontKiaraisasuburbpopularwithexpatriateresidents.Here,propertiesofasimilarqualitytoKLCCcanbehadforhalfthepricepersqft,althoughcapitalappreciationisjustasstrong. IskandarMalaysiainJohorstate,northofSingapore,isa2,217sqkmsitetargetedformassivegrowththathasthepotentialtoemergeasanewprimelocation.NexusKarambunaiisaluxuryholidaydevelopmentinEastMalaysiathathassoldsuccessfullytoregionalbuyers,butsofarMalaysia,whileofferingsomestunningbeachdestinations,doesnothaveasecond-homeequivalentofPhuketinThailandorBaliinIndonesia.

NEW DEVELOPMENT PRICES IN KUALA LUMPURLOCATION RM Sq ft (US$ Sq m)

THEBINJAIONTHEPARK(KLCC) 2,400 (7,598)

PAvILIONRESIDENCE, 1,500BUKITBINTANG (4,749)

vERTICASRESIDENSI 1,250 (3,957)

MONTKIARACONDOMINIUMS 620 (1,963)

auStraliaAustraliamaybeverydifferentintermsofgeographyandculturefromotherAsiaPacificlocations,butmuchofitseconomicwealthderivesfromexportstocountrieslikeChina,IndiaandIndonesia.Agrowingnumberofprimeor“prestige”propertiesarealsobeingsoldtobuyersfromtherestoftheregion.

Sydney,MelbourneandPertharethethreemainurbancentresforprestigeneighbourhoods,whileSydney’sPalmBeachsuburbandresortsonQueensland’sGoldCoastaretheprincipallocationsforluxuryholidayhomes.Therearealsopocketsofexpensiveruralretreats,suchasBowral,withinafewhours’driveofSydney. Pricesstartedtostabiliseinthemiddleof2009afterexperiencingsignificantfallsandhavesincebouncedbackbyaround5%fromthebottomofthemarketwithsteadyfurthergrowthpredicted,accordingtoJamesHall,headofKnightFrankAustralia’sresidentialdivision.Intheearlypartof

Cambodia AlthoughCambodiaisprobablyfiveto10yearsbehinditsneighbourvietnamintermsofeconomicdevelopment,thecountry’sfledglingprimeresidentialpropertymarkethasalreadyseenrapidpriceswingsoverthepastfewyears,saysTanHongKiat,headofKnightFrankCambodia. Speculation,drivenpartlybythereturnofwealthyCambodianswhofledthecountryduringtheKhmerRougeera,combinedwithsignificantlevelsofinvestmentbyKoreandevelopers,causedaspikeinpropertyvaluesduringthelatterhalfof2008andthebeginningof2009.“Localpeoplewerebuyinglandwiththehopeofflippingittomakeaprofit,”saysTan.

Althoughvalueshavefallenbackbyasmuchas40%,someofthepricesbeingpaidforthemostexpensiveaddressesremain“quitescary”,hesays.“ApartmentsinGoldTower42,whichwillbePhnomPenh’stallestbuildinguponcompletion,arestillmaking$3,500sqm.”OthersimilardevelopmentsinthepipelineincludeDeCastle’sprojects,PoscoStarRiverandCamkoCity. TheBouengKengKang,ChamkarmonandDaunPenhareasofthecapitalPhnomPenh,whichretainsmuchofitsattractivecolonialarchitectureandboulevards,areCambodia’sprincipalprimeresidentialareas,butthereisincreasingdevelopmentinthetouristtownofSiemReapthatservicestheAngkorWattempleruins.ThegovernmentisalsotryingtoattractmoreinvestmenttocoastaltownslikeSihanoukville. Intermsofoverseasbuyers,Cambodiadoesnotyethavetheequivalentofluxurysecond-homecoastalresortslikeThailand’sPhuketorasignificantex-patcommunitybecauseownershipofbuildingsiscurrentlyrestrictedtoa99-yearlease. Tan,however,saidthatdraftlegislationthatallowsforeignerstoownstratapropertiesinCambodiahasalreadybeenapproved.

PHNOM PENH PRIME PROPERTY PRICESLOCATION US$ Sq m

BOUENGKENGKANG–vILLAS 1,300-3,000

DECASTLEROYAL–CONDOMINIUMS 1,080

CAMKOCITY–CONDOMINIUMS 1,415-1,490

2009,uptoone-thirdofsalesweretoAsianinvestorstakingadvantageoflowpricescombinedwiththeAustraliandollar’s40%slide,headds. Sydney’s“old-money”suburbssuchasBellevueHillandPointPiper,closetotheharbour,havebeenthemostresilientastherewerefewforcedsalesduringthedownturnwithpotentialvendorswaitingforthemarkettorebound,saysHall.SuburbslikeMosman,popularwithHNWIsemployedinthebankingandinvestmentsectorsandmoredependentonmortgagefinance,are15%to20%offthepeaksseenattheendof2007,headds,butwithbankbonusesbackontheagendapricesshouldstarttorecover. Second-homedestinationswerehitharderwithpricesstilldownupto35%.“Itseemedasifeverysecondorthirdhomewasforsalein2008,”saysHall. InPerth,aminingmagnaterecentlypaidanAustralianrecordofAU$57.5mforamansionontheSwanRiver,whileinMelbourneAvonCourtinHawthornwentforalocalhighofAU$25m.“Therearesignsthatthereallyrichhavebeencashinginonthedownturn,”saysHall.

TYPICAL PRESTIGE AUSTRALIAN PROPERTY PRICESLOCATION AU$m (US$m)

BELLEvUEHILL,SYDNEY 7-10(6.4-9)

TOORAK,MELBOURNE 5-10(4.5-9)

SWANRIvER,PERTH 3-8(2.7-7.3)

KEY LOCATIONS1.SIEMREAP2.PHNOMPENH3.SIHANOUKvILLE

KEY LOCATIONS1.DELHI2.MUMBAI3.HYDERABAD4.ALIBAG5.BANGALORE6.CHENNAI

KEY LOCATIONS1.PERTH2.MELBOURNE3.SYDNEY4.GOLDCOAST

KEY LOCATIONS1.JAKARTA2.BALI

KEY LOCATIONS1.KUALALUMPUR2.ISKANDAR



KnightfranK.comcitiprivatebanK.com 25

the Wealth report

PROPERTY SPECIAL FOCUS ON ASIA PACIFIC

aSia pacific in nUmberS

geographySize isn't always everything when it comes to economic power and wealth in Asia Pacific

gDpThe region has the world's second-largest economy, and also some of the smallest

economicsVital statistics for potential investors in the region

populationThree out of the world's top-five most populous nations are in Asia Pacific

Sq km

World rAnk (2008)

GdP 2009 (eST)**1

US$bn

GdP 2010 (eST)**1

US$bn

GdP % CHAnGe 2009 (eST)** (loCAl CUrrenCy)

GdP % CHAnGe 2010 (eST)** (loCAl CUrrenCy)

% GdP by SeCTor (2007 or 2008)*

AGrICUlTUre

IndUSTry

SerVICeS

PoPUlATIon*(m 2008)

World rAnk

InCome Per CAPITA* (US$ 2008)

CUrrenT ACCoUnT bAlAnCe 2010 (eST)**(US$ bn)

CPI InflATIon 2010 (eST)**

SToCk mArkeTS***% CHAnGe 2009

exCHAnGe rATeS(1US$ feb 1, 2010)

reSTrICTIonS on foreIGn oWnerSHIP of ProPerTy

GDP

$

$

181,040

117

10.911.7

¯2.74.3

322741

1561

600

¯0.854.1

¯riel 4,200

9,598,088

2

4,7585,263

8.710

114940

1,3261

2,940

4510.690

renminbi6.8

1,092

40

209221

¯3.63.5

08

92

795

31,420

240.574

hK$ 7.8

3,287,260

12

1,2431,339

5.67.7

182953

1,1402

1,070

¯348.493

rupee 46.5

1,904,570

18

515569

44.8

144837

2284

2,010

36.288

rupiah9,300

329,740

41

207216

¯3.62.5

104842

2743

6,970

241.251

ringgit 3.4

699

46

163179

¯3.34.1

02872

5112

34,760

221.676S$ 1.4

513,120

33

266282

¯3.53.7

124643

6719

2,840

82.165

baht 33

329,310

58

921034.65.3

204238

8613

890

¯101157

Dong 18,500

9,632,030

1

14,266

14,704

¯2.5

2.7

1

22

76

304

3

45,390

¯325

1.7

29

US$ 1

243,610

6

2,198

2,353

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1.3

1

23

76

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22

47,850

¯46

1.5

35

£

0.60

1

6

78

3

529

4

1australia

2cambodia

3china

4hong Kong

5india

6indonesia

7malaysia

8Singapore

9thailand

10vietnam US UK

10

overseas buyers need clearance from foreign

Investment review board to purchase existing

houses

Can only rent on long lease

Can purchase freehold after

one year of residence

no restrictions not permitted, unless Indian

resident overseas

freehold only available to Indonesians

Can buy property worth over 500,000

ringgit

Can purchase freehold "strata-title"

for condominiums. but foreign

ownership restricted to 49% of total

space

only overseas Vietnamese allowed

to buy freehold

7,741,220

13

9209830.73

2

¯¯¯

2150

40,350

¯551.545

aU$ 1.1

SoUrCeS:* World bank** Imf forecasts *** World federation of exchanges (domestic market capitalisation in local currency. biggest exchange by volume quoted if more than one) 1 All estimated changes from Imf World economic database october 2009, except China, India, Uk and US, updated in January 2010

foreigners not allowed to purchase

landed residential properties



KNIGHTFRANK.COMCITIPRIVATEBANK.COM 27

AccordingtoOliverBarker,seniordirectorofcontemporaryartatSotheby’s,theartmarketismoreinternationalthaneverbefore.“BuyersoflotsthatsoldforoverUS$1mcamefrom27countriesin2004.In2008to2009thisdoubledto54countries.”ThesamepatternhasbeenseenforprimeLondonproperty.In2007KnightFranksoldhousesto33nationalities.Lastyearitwas49. “Artfollowscommerce,”saysPeterBoris,executivevicepresidentofleadingNewYork-basedgalleryPaceWildenstein.“Withoutdoubt,artistsfromtheworld’sneweconomieswillplayanincreasinglyimportantroleinthehistoryofart.Newart-makingcentresarespringinguparoundtheworld.ItishappeninginChinaandIndia,butalsoLatinAmerica,AfricaandtheMiddleEast.” LengLin,presidentofPace’sBeijinggallery,saysmoreChinesecollectorsarenowpayingattentiontocontemporaryart.“Thenumberissmall,comparatively,buttheyarebeginningtoplayamoreimportantrole.Moreattentionispaidtolocalartists,butChinesecollectorsarenevernarrow-mindedasthecountryitselfhasbeendeeplyinvolvedinglobalisation.

“There are more and more good artists, but during the past decades wealth has grown at an even higher speed in China and, as a result, the money overflowing from the local art market will go into the international market.”

Anotherparallelbetweenartandpropertymarketsplayingoutnow,incontrasttothefrenzied,andsomemightsayundiscerning,buyingrushwitnessedinbothsectorsattheheightoftheboom,isthefocusonquality.“Masterpiecesandworksthatrarelyenterthemarketareaggressivelysoughtafter,”saysBoris. Extremelywealthyartcollectorsarepreparedtopaytopprices,butonlyfortheverybestworksfromtop-drawerartists,confirmsBinstock.“Thisapproachismuchmorereminiscentofthepurchaseofaprimaryresidentialproperty.Peoplearenotbuyingonspecorlookingforthenexthotartist.” Lin,whohasplayedakeyroleinthedevelopmentofChinesecontemporaryartasadealer,curator,criticandartist,saysthatcontemporaryartisnolongerbeingjudgedpurelybyitsfinancialvaluesincetheeconomiccrisis.

ARTISTS TO WATCH

Jonathan Binstock Luc Tuymans George Condo El Anatsui

Peter Boris Stirling Ruby Li Songsong Sudarshan Shetty

Leng Lin Hai Bo Yin xiuzhen Wang Guangle

Oliver Barker Chris Ofili Urs Fischer

THE WEALTH REPORT

TRENDS the ContemPorarY art marKet

follows

RECENT ExCEPTIONAL AUCTION RESULTS FOR CONTEMPORARY ART OFFER INTERESTING PARALLELS WITH LONDON’S PRIME PROPERTY MARKET.ANDREW SHIRLEY INVESTIGATES

OnSeptember15,2008,inthemidstofthebankingcrisis,theLondonauctionhouseSotheby’sraises£110mwithitsBeautiful Inside My HeadsaleofworksbytheUK’sDamienHirst.Tomany,thisisthefinaldefiantstandofanover-heatedcontemporaryartmarketthatwillnotberepeatedformanyyears. Fastforwardjust18monthstoFebruary3,2010,whentheglobaleconomyisrecovering,buthardlyinrudehealth.L'homme Qui Marche I,abronzebySwisssculptorAlbertoGiacometti,beatsthepreviousrecordforasinglework–Picasso’s1906portraitBoy with a Pipe–whenitissoldbySotheby’stoananonymousbuyerforanastonishing£65m,fourtimesitshighestimate. TheGiacomettisaleisnotaloneinachievingstellarprices.InNovember2009,12bidderspushAndyWarhol’searlyPoppainting200 One Dollar BillspastitsUS$8mtoUS$12mestimatetoalmostUS$44m. Overasimilartimescale,primepropertyinLondon,drivenbyashortageofstockandasurgeininterestfromoverseasbuyers,increasesinvalueby15%fromitscredit-crunchnadir. JonathanBinstock,anexpertoncontemporaryartatCitiPrivateBank’sartadvisoryservice,sayssimilardriversareatplayintheartworld.“volumesaredownverydramatically.Therehasn’tbeenanoverwhelmingnumberofforcedsellers,andpeoplewhodon’thavetosellaren’t.” Auctionhousesarealsobeingveryconservativeaboutwhattheysellandhowtheysettheirpre-saleestimatestohelpencouragecompetitivebidding,headds. Whathasreallyhelpedsustainthecontemporarymarket,however,istheglobalisationofdemandonthebackofrapidwealthcreationindevelopingnations,Binstockemphasises.“BuyersarenotjustcomingfromtheUKandUS.”

commercecommerceArt

ImageusedwithkindpermissionofSotheby's.ALBERTOGIACOMETTIL'HOMMEQUIMARCHEISoldatauctionforarecordpriceof£65,001,250–themostexpensiveworkofarteversoldatauction.

|

“Theartthatemphasiseshumanityandspirituality,theworkthatshowsaconnectionandawarenessofhistory,ismostvalued.Themoreconservativeartists,thosewhohaveadirecthandintheart-makingprocess,haveperformedbetter.Thenewtrendwillbeopposingmakingartentertainingorfashionable.Itwillbefocusingmoreonpurifiedforms.” Extrapolatingthistrendtopropertymarketsmaybestretchingtheparallelstoofar,butthesimilaritiesandlessonsfromthepastareclear.Artorpropertyoftheveryhighestqualitywillalwaysbeattractivetothediscerningbuyer,butspeculateatyourperil.



UNITED STATES

2,519,000

-19%

UNITED KINGOM

439,000

-21%

JAPAN

669,000

-12%

CHINA

343,000

-11%

GERMANY

342,000

-9%

FRANCE

266,000

-14%

ITALY

232,000

-18%

CANADA

216,000

-19%

BRAZIL

181,000

-9%

SWITZERLAND

165,000

-13%

AUSTRALIA

146,000

-20%

MEXICO130,000

-4%

RUSSIA101,000

-23%

NETHERLANDS100,000

-22%

SPAIN97,000

-18%

SOUTH AFRICA96,000

-11%

INDIA85,000

-24%

HONG KONG72,000

-23%

SINGAPORE58,000

-22%

ARGENTINA49,000

-13%

BELGIUM46,000

-23%

CHILE30,000

-2%

UAE21,000

-2%

COLOMBIA20,000

-2%

INDONESIA19,000

-16%

PORTUGAL13,000

-24%

ISRAEL7,000

-12%

KNIGHTFRANK.COMCITIPRIVATEBANK.COM 29

THE WEALTH REPORT

MONITOR sCorPio Wealth distriBUtion model

UNITED KINGDOMTheUKlacksasubstantialdepthofwealthcreationoutsidetheLondonhinterland.Strongasitis,onecityisnotenoughtosustainwealthcreationforthewholecountry.TheUKwoulddowelltoconsiderhowGermanyhassupportedregionalwealthcreators.

UNITED STATESTomymindtheprospectsfortheUSaretoooftenoverlookedinthesearchforthenextnewlocation.EverydecadeorsotheUSseemsdoomedand,whetheritisthetechboomorthefinancialservicesboom,somethingcomesalongtosalvagetheeconomy.

ASIAAsiawillbemuchmoredominant–therateofeconomicgrowthemanatingfromChinawillensurethat.ButthereismoretotheregionthanChina.SouthKorea,TaiwanandIndonesiahaveallbeenveryimpressivethroughtherecentdownturn–theirgovernmentsmanagedtheireconomiesmuchbetterthanduringtheAsianCrisisoftheearly2000s.

FiguresdenotenumberofHNWIswithinvestableassetsoverUS$1m,andannualpercentagechange

OursurveyofglobalwealthdistributionpointstoasharpdropinthenumbersofHNWIs.SebastianDovey,headofScorpioPartnership,looksaheadattheareasdestinedtonurturethefuturewealthleaders Fewcornersoftheworldwereleftuntouchedbynetassetvalueerosion,suchwastheglobalreachoftheeconomicdownturn.Butthefactthatassetpriceshaverecoveredstronglysincemid-2009meanswecanexpectthenumberstorecoverrelativelyrapidly. However,thinkingbeyondmovementsinassetpricing,wecanbegintomakesomeinformedstatementsonhowourmapwilllookattheendofthenewdecade. IfIcouldpointtoonethingthatposesthebiggestrisktowealthcreationrightnow,itwouldbeaccesstocapital.Newbusinessventuresandthegrowthofsmallenterprisesarebeingstifled–itisworseinEuropeandtheUS,butonlymarginallybetterinAsia.Thereisarealriskofademographic"hole"emerging,withthefuture"wealthclassof2010and2011"missingtheopportunitytostarttheirprojectsthatinnormalcircumstanceswouldleadtothemjoiningtheranksoftheHNWIinadecadehence.

EUROPEInmanyEasternEuropeancountriesitisnotclearwhethertheywillfollowtheGermanMittelstadtmodel,withthegrowthofastrongmid-wealthtierofsmallandmedium-sizedbusinessowners,oramoreRussianorplutocraticmodelwithagreaterconcentrationofextremewealthamongfewerindividuals.

RUSSIAInRussia,theseplutocratshavebeenjoinedbyatierofwealthyindividuals–professionalservicesexpertsinparticular–whospecialiseinprovidingservicesthesuperrichconsume.WithassetsbetweenUS$1mtoUS$5m,theyhaveaddedslightlymoredepthtothewealthpopulation.

NORTH AFRICANorthAfrica,especiallyMorocco,andeventheLevantstatesarelookinginterestingfromanemergingwealthperspective.WeexpectthemtolookatpotentialEUmembership,oratleastEEAaffiliation.Eventhebeginningsofthisprocesswilldriveimprovementstotheregulatoryandbusinessenvironmentineach country.

The Scorpio Partnership’s proprietary Wealth Distribution Model. This model combines macro¯economic and micro¯economic data to estimate the ‘true’ distribution of wealth across different countries. The distribution data is based on parametric distributions of wealth, and builds in particular on the work of Vilfredo Pareto and subsequent academic developments in the fields of both economics and statistics. Parameterisation of the wealth distribution is validated against a number of statistical sources, including data from the IMF, UN, national household surveys, national balance sheets and rich lists. Growth figures are measured in both real terms and local currencies in order to allow for adjustment for inflation and exchange rate fluctuations.

Scorpio Partnership is an international business consultancy firm to the wealth management industry.

scorpiopartnership.com

SPREAD THE WEALTH

|



http://www.scorpiopartnership.com


The value of prime property is intrinsically linked to the creation of new wealth. In

an exclusive interview with THE WEALTH REPORT, Ian Bremmer, president of Eurasia Group, the world's

leading political risk research and consulting firm, looks at

some of the factors that could affect global wealth creation as we kick off a new decade

ONE WR: A number of Western governments have responded to the impact of the credit

crunch by proposing tougher financial regulation, restricting bank bonuses and increasing the tax burden of the wealthy. In London this potent cocktail, combined with a new tax on non¯domiciled residents, has led to howls of indignation and even suggestions that the city's prime property market will suffer as the rich pack their bags. Do you believe that this is really likely to be the case in London and, to a lesser extent, New York?

Ib:Notatall.First,forNewYork.PainwillbeinflictedonWallStreetthisyearintheformofatougherregulatoryenvironment,especiallybecausePresidentObamaandtheDemocraticleadershipwillneedaresonant,populistissuetowinbackvotersbruisedandbatteredbyarougheconomy.ButUStaxratesareconsiderablylowerthaninotherOECDcountries.FinancialplayersinNewYorkcanaffordtoabsorbsomepain,andtheywilldojustthat.TheproblemismoreacuteinLondon,andsomehedgefundshavemoved.Butthefearthatmajorfinancialplayerswillexiteithercityinlargenumbersisexaggerated.Thereisnothingnewinthesehowlsofindignation,andamoveismoreeasilythreatenedthanaccomplished. Tocreatethesortofecosysteminwhichafinancialcentrecangrowandthriveyouneedspecificpolitical,economicandsocialconditions.

Youneedapoliticallystableenvironment,astablelegalsystem,relativelyeffectivepolicingofcorruption,baselinesocialharmony,awell-educatedlocalworkforce,abroadeconomicbase,andaliberalpolicyenvironmentthatencouragesthecross-borderflowofideas,information,people,money,goodsandservices.OutsidetheUnitedStatesandWesternEurope,onlyTokyomeetstheserequirements.ButJapanholdstoelementsofaclosedeconomy,andtheJapaneseworkforcedoesn’thavetheinternationalorientationyou’llfindinNewYork,London,zurichorBerlin. Forthemoment,IexpectthatLondon’slosseswillbeNewYork’sgain.ButIalsoexpectfinancialplayersinbothcapitalstodotheirgrumblingandfighttheirregulatoryfightsonfamiliarground.

TWO WR: Do you believe there are still some aftershocks of the

credit crunch on the horizon this year and what countries could be vulnerable?

Ib:That’snotatallunlikely,andseveralEuropeanstatesappearquitevulnerable.We’reseeingthereturnofseriouspoliticalrisktotheEurozone,andthelinethatseparatesdevelopedfromdevelopingstatesisnotasdistinctasitwasbeforethefinancialcrisisbegan.MarketsmaybeunderestimatingrisksofdefaultinsomeEUmemberstates,andtherealityisthatEUsupportforthemisnotasurething.Evenwithoutadefault,governmentsmayrespondtoeconomicstagnationwithbudget-bustingspendingmeanttopropupshakysectors.Greece,Ireland,Spain,PortugalandperhapsevenItalyappearthelikeliestsuspects.Inaddition,lingeringhighunemploymentisanespeciallyseriousprobleminEasternEurope,whereelectionsinseveralcountriesoverthenextfewmonthscouldpersuadeanxiouspoliticalofficialstoappeasetheangryunemployedwithprotectionist,populist,andevenxenophobicpolicyplans.Ukraine,HungaryandLatviaareespeciallyvulnerable,butevenPolandcouldtakeahit.Anotherworry:IfoneofthebigWesternEuropeanbanksactiveinEasternEuropegetsitselfintrouble,rescueeffortscouldquicklybecomequitecomplicated. WecouldalsoseeabitmoreturmoilinJapaniftheDPJgovernmentpressesaheadwithambitiousspendingprojectsthatignorethecountry’sfiscalproblems.

THREE WR: You name the deteriorating

relationship between China and the US as the biggest global risk in 2010 – what could be the impact on the rest of the world if this relationship crumbles?

Ib:Wewouldfirstseeagreaterregionalisationofcapitalandtradeflows,asgovernmentsintervenedirectlytoreducetheirexposuretocommercialandpoliticalrisk.Thatwouldleadtolessefficienteconomicdecision-makingandalowertrajectoryforglobalgrowth. Longerterm,mostofAsiawouldfinditselfrelyingmuchmoreheavilyonChinaforcapitalflows,investment,andtrade.Japanwouldbecaughtinanunsustainableposition,anditsleadershipwouldeventuallyhavetochoosebetweena“Taiwanmodel”ofdevelopment,whichwouldrequirethatpoliticalandsecurityissuesarepushedasideforthesakeofeconomicgrowthanddeeperdependenceonChina,andan“Israelmodel”thatlimitsgrowthpossibilitiesinfavourofpoliticalandsecuritycontainmentofChina’sexpansion.We’dseeChina’srivalrywithIndiabecomemuchmoreevident. TheUnitedStateswouldrespondbytryingtocreateaG3,asystemthatreliesoncoordinationandcollaborationwithJapanandtheEuropeanUnion.We'realreadyseeingthisemergingdynamiconthefinancialsidebetweentheUSFederalReserve,theEuropeanCentralBank,andtheBankofJapan.Thedomesticdistractionscreatedbythefinancialmeltdownhavelimitedgreaterdirectcooperationonpoliticalandsecurityissues,butabreakdowninUS-ChinarelationswouldeventuallyfueltheG3trendinthoseareas,aswell.

FOUR WR: Developing nations, and China in particular,

have been the big economic success story of the past decade providing a steady stream of cash¯rich buyers looking to acquire trophy properties in the world's most desirable locations. Can we expect this wealth creation trend to continue in the new decade or will it stutter, as some contrarian analysts are already predicting?

Ib:WeshouldexpectChinatocontinuetoinvest.Thereisstillenormouspotentialforthemtocontinuetobuildinfrastructureandanenormousvaluepropositionwithsomuchurbaninfrastructurelefttobuildandanincreasinglywell-educatedandaffordableworkforcetobuildit.China,India,andBrazilwillallbenefitfromthistrendandfromstrongbaselinepoliticalstabilitywithinallofthem.ForBrazil,addthenewresourcesthatwillcomeonlineovertime,andthestatewillhavedeeperreservesatitsdisposalforinvestment.

GLOBALWEALTH

RISKS

31 }

THE WEALTH REPORT

MONITOR gloBal Wealth risKs

ONE

FOUR

SEVEN

NINE

TWO

FIVE

EIGHT

TEN

THREE

SIx




SEVEN WR: You have picked out

Indonesia as a recent economic success story, which are the other emerging economies that you would pick as the potential bright stars of the new decade and which will continue to squander their natural wealth through corruption and political mismanagement?

Ib:Nigeriaandvenezuelahavemorewealthtosquander.SomewouldincludeArgentinainthiscategory,butIexpectthatcountrywillhaveanewgovernmentnextyearandthatwe’llseeaturnaroundintheeconomicapproachthere.Turkeyshouldbeamuchbetterstorythanitis,butthenever-endingstrugglebetweentheAKPgovernmentandthecountry’sseculareliteswithinthemedia,military,andbusinesscommunityprovideacontinualdistraction. Forthebrightstars,thereareseveralMiddleEasternstatesworthalook.AbuDhabihashelpedcleanupDubai’smess,makingtheUAEasoundlong-termbetagain.InEgypt,wehaveaverystablegovernmentandanemergingconsensuswithinthepoliticaleliteinfavourofmarketreform.TheSaudileadershiphasmadesolidprogressindiversifyingitseconomyawayfromover-relianceoncrudeoilproduction,andstabilitywillbereinforcedbyasmoothsuccessionprocessonceKingAbdullahpassesfromthescene.EveninIraq,thereiscauseforlong-termoptimism.Fromaverylowbase,thecountryhasanewopportunitytoexploititsupsidepotentialasthecountry’svarioussectsacceptthatthereareplentyofspoilsforallifopenconflictcanbeavoided.

EIGHT WR: Agricultural real estate

has become a big global investment play in recent years, partly on the back of concerns about future food security. In your recent report looking at the top 10 risks facing the world in 2010, you don't mention food security. As world populations increase and more farmland is degraded or used for development do you foresee that food security will become a more significant political risk as the decade progresses?

Ib:Foodsecurityshouldn’tbeconsideredanimmediateriskfor2010.Longerterm,Iwouldbetontechnologicalimprovementsandtheabilityofsomeofthemostvulnerablestatestoimportneededinfrastructure.I’mmoreconcernedaboutwatersecurity,anessentialpartofthefoodproductionprocess,butalsoanunderappreciatedelementinenergyproductionandpowergeneration.Someforecastscallfora40%increaseinglobaldemandforwateroverthenext15years.ConditionsareespeciallysevereinnorthernandeasternAfrica,theMiddleEast,andSouthAsia.ThereareplentyoffightsbrewingoverthisissueinIndiaandChina,inparticular,whereit’seasiertoimportfoodthanwater.Ingeneral,theworldisgoingtoneedsolidlong-termplanningonhowbesttouseenergyinthewaterproductionprocessandwaterintheenergyproductionprocess.Theseareissueswereallyhavetogetright.

NINE WR: A number of cash¯rich, land¯poor countries in the Middle

East and Asia are reportedly already acquiring millions of acres of farmland in some of the world's poorest nations that often cannot feed their own populations. Do you see this as a positive or negative move, and is following such a strategy just creating new political risks for the governments on either side of the deal?

Therearebothrisksandopportunitieshere.Greaterinvestmentininfrastructureinplacesthatneeditisclearlyagoodthing.Itwillcreateeconomicopportunitiesforlocalpeoplewhodesperatelyneedit.Italsogivespowerfulcash-richgovernmentsinAsiaandtheMiddleEastatangiblestakeinthepoliticalstabilityofcountriesatseriousriskofbecomingfailedstates.Aswe’vecometolearnoverthepastseveralyears,ungovernablestatesbecomebreedinggroundsforallkindsoftrouble,fromterrorismtopiracytoorganizedcrime,andsoon.Thedownsideofthesepropertypurchasesisthatitdoesexposetheinvestorstatestoconsiderablerisk.

TEN WR: In general, what do you see as the biggest risks to future global wealth creation –

social upheaval, military, demographic pressures, scarcity of resources, climate change? Where are these risks concentrated, and what areas of the world give you most concern?

Ib:Longerterm,terrorismisrisknumberone.Weareallwellawareofthemanygoodthingscreatedbytechnologicalinnovation.Butitiseasiertodaythaneverforasmallgroup,orevenasingledeterminedindividual,tocommitactsofviolencethatimpactthelivesofmillionsofpeople.Thereisalsotheriskthatifalargeattackgeneratesanunprecedentedleveloffearwithinsociety,thecuremayproveworsethanthedisease.Climatechangeisanothersourceofseriouslong-termrisk,thoughitwillalsocreatesomeinterestingopportunities.Onthedownside,we'relikelytoseechangesinclimatepatternsthatunderminetheproductivityofagriculturallandinunpredictableways.Butunprecedentedopportunitiestodeveloparcticresourcesandnewagriculturallands,aswellaschangesinshippinglanes,willcreatewinnersaswellaslosers.

FIVE WR: If this growth does continue can China realistically emerge as a

new superpower and will we see a fundamental shift in political and economic power away from more mature Western economies to the developing world?

Ib:Yesandnoonthesuperpowerquestion.Chinahasgottenmuchcloseroverthepastdecadetodevelopingtheeconomichefttobehavelikeasuperpower.Itsmilitarypotentialisanothermatter.First,BeijinghasneitherthemeansnorthedesiretomatchUSmilitaryspendingdollarfordollar.ThereismuchdeeperChineseinvestmentinasymmetriccapabilities–incyber-warfare,forexample.ButChinawillremainfartoopreoccupiedwithitsgreatestdomesticchallenge–sustainingthepaceofjobcreationnecessarytosafeguardtheCommunistParty’sholdonpoliticalpower–toallowitselftobedistractedbytoomanyforeignentanglementsorburdenedwithgeopoliticalresponsibilities.TheUSwouldloveforChinatoacceptsomeinternationalburden-sharing.TheChineseleadershipisfartooriskaverseforanythingthatsmacksof“adventurism.” ThetransitionfromaUS-dominatedunipolarorderwillonedaycreatemoreofamulti-polarorder.Butthat’salong-termdevelopment.Forthenextseveralyears,we’relikelytoseesomethingthatlooksmorelikea“non-polar”order,oneinwhichtheUSretreatsfromsomeofitsinternationalcommitments,butwithotheremergingpowerstoopreoccupiedwithdomesticchallengestowanttotrytofillthevacuum.

SIx WR: The Russian wealthy, who are major players in some of the world's most expensive property

markets, have even been given their own name. Will these oligarchs have as much financial firepower in the future or will they dwindle as the Kremlin adopts less of a free¯market approach to Russia's economy?

Ib:Theywillstillplayasignificantrole,becausetheyremainusefulforthepoliticalleadership.TheKremlinpracticesadifferentformofstatecapitalismthanwefindinChina.InRussia,theoligarchsareallowedtoownvaluableassetsonconditionthattheyplaytheirstate-assignedrolesintheelitedrama.Sometimestheroleisscapegoat.Ifthegovernmentneedstoblamesomeoneforfactoryclosuresorhighprices,theoligarchwhoownsthefactoryorthestoremakesforaconvenienttarget.OligarchsallowtheRussianpoliticalleadershiptoexerciseahighdegreeofcontrolwithoutmuchresponsibilityintheeyesofthepublic.Andaslongastheoligarchssupportthepoliticalstatusquo,thereisnoreasontoberidofthem.

33

EURASIA GROUP’S 10 LEADERS TO WATCH IN 2010

THE WEALTH REPORT

MONITOR gloBal Wealth risKs

1 US¯China Relations Can the world’s largest economies get on?

2 Iran iranian regime looking increasingly like a

cornered, wounded animal

3 European fiscal divergence Political risk returns to the eurozone as

government debt mounts

4 US financial regulation Could new regulatory powers go too far?

5 Japan does 2010 mark the start of a new

“lost decade”?

6 Climate change Copenhagen failure could hamstring

global approach

7 Brazil investor concerns mount in october election

run up

8 India¯Pakistan islamic extremists could reignite old conflicts

9 Eastern European, elections Upcoming elections could increase instability

10 Turkey ruling Justice and development Party

(aKP) under threat on all sides

See full details on eurasiagroup.net

EURASIA GROUP’S 10 POTENTIAL GLOBAL RISKS IN 2010

Ian Bremmer is the president of Eurasia Group eurasiagroup.net He created Wall Street's first¯ever global political risk index, and has written several books, including The J Curve: A New Way to Understand Why Nations Rise and Fall. His upcoming book, The End of the Free Market: Who Wins the War Between States and Corporations?, details the new global phenomenon of state capitalism and its geopolitical implications. He has a PhD in political science from Stanford University and lectures at Columbia University.

1 Wen Jiabao (China) Chinese premier has to reconcile rapid

economic growth with inflationary pressures

2 Barack Obama (US) mounting domestic and foreign policy issues

will test the Us president in 2010

3 Ichiro Ozawa (Japan) scandal-tainted politician whose survival

could be key to electoral success for the democratic Party of Japan

4 David Cameron (UK) has huge economic issues to deal with

if his Conservative party wins UK election

5 Luiz Inacio Lula da Silva (Brazil)

Popular final-term president pushing for a greater international role for Brazil

6 Ali Akbar Hashemi Rafsanjani (Iran)

Former president could play key role in shaping trajectory of islamic republic in 2010

7 Ashfaq Kayani (Pakistan) Pakistan’s top soldier will have significant

impact on Us counterinsurgency campaign in afghanistan

8 Vladimir Putin (Russia) Prime minister and former president

remains russia’s most popular and powerful political figure

9 Sheikh Khalifa bin Zayed al Nahyan (UAE)

abu dhabi leader and the Uae’s president with close ties to Washington is set to consolidate power in the region

10 Olii Rehn (EU) european Commissioner for economic

and monetary affairs must manage growing eU fiscal problems

See full details on eurasiagroup.net

|



http://www.eurasiagroup.net




WINNERS AND LOSERS OurlatestresultsconfirmthatLondonsawthenumberonespotwrenchedfromitsgraspbyNewYork.TheUK’scapitalhassufferedmorethanmanyfinancialcentresduringtherecentfinancialdownturnandthereisgrowingconcernamongthefootlooseinternationaleliteoverthecity’spreviouslyrelativelystabletaxenvironment. Despitethisreversaloffortuneatthetopofthetable,thegapbetweenthetopfourcities(NewYork,London,ParisandTokyo)andthenextcity(LosAngeles)isstillsubstantial,suggestingitwillbesometimebeforetheemergingcitycontenderswillposeaseriouschallengetothetopgrouping. Unsurprisingly,oneofthekeythemesthisyearisthestrengtheningpoweroftheemergingcentres,withbiggainsexperiencedbythelikesofBeijing,Singapore,Shanghai,KualaLumpurandMumbai.Drivenbytheirimprovementsinpoliticalpowerandinfluence,butalsobyeconomicdrivers–inparticulartheastonishingrateofgrowthoffinancialsectoractivityinShanghaiandBeijing,forexample–allthesecitiesarebeginningtogaininstatureandpower. InamongstthebigAsianwinnersaresuccessstoriesfromthedevelopedeconomies,withstrongresultsinlocationslikeBerlin,Brussels,SydneyandBoston.InBerlin’scaseitrecordedanimprovedshowingacrosstheboard,benefittingfromgreaterpoliticalconfidencewithintheEU,itsconsolidationofeconomicleadershipwithintheEurozoneandalsobroaderculturalandintellectualinfluence. Itisnoticeablethatitisthemorehard-edgedmeasures,economicandpoliticalpower,forexample,wheretheemergingmarketcentresaregainingground.ThisyearBeijingrosetofourthplaceinpoliticalpower,leapingaheadofLondon,ParisandTokyo,whileSingapore,ShanghaiandBeijingallsawimprovedrankingsforeconomicactivity. Wheretheemergingcentresstillfallshortisonthesofterissuesofqualityoflifeandknowledgeandintellectualinfluence.Thesearestrongcardsformanycitiesinthedevelopedworld–especiallyintheUS,northernEuropeandJapan.Berlin,Paris,zurichandTokyosawimprovedrankingsonqualityoflifemeasures.Again,eventhoughtheydeliveredstrongresultsinlastyear’ssurvey,thereal

leadershipintermsofknowledgeandinfluencehascomefromtheUSandEurope,withimprovedrankingsforNewYork,ParisandWashingtonDCamongstothers.

KnightFrankWorldCitiesSurvey2010

THE NEW POWER BROKERS

LESSONS FOR ASPIRANT CITY LEADERSThechangesoverthelastyearinourrankingsshouldn’treallycauseanygreatsurprises.Themainemergingmarketcitiesarebeginningtoclaimthepoliticalandfinancialinfluenceandleadershipthattheirnewlydevelopedeconomicpowerjustifies.However,thereisamorecomplexstoryplayingouthere. FortherisingcitiesofAsia,economicgrowthandgreaterpoliticalcloutontheirownwillnotsucceedinpropellingthemtothetopofthetableintermsoflocationswheretheworld'smostinfluentialcitizenswanttohaveafirstorevenasecondhome. Whatlessonscanthesecontenderstakefromthecitiesatthetopofoursurvey?Itwouldseemthattomatterasaworldcityyouneedtoscorewellonallmeasures;youneedabroadbaseofappeal–somethingclearlydemonstratedbybothParisandTokyo.Worldcitiesareconnected,intermsoftransportandcommunications,but,moreimportantly,intermsofideas.Thesearethelocationswheretheworld’smostinfluentialpeoplewanttocongregatebecausethesearethelocationswheretheideasandvaluesthatdefinetheglobalagendaandshapetheworldaresettled. EvenacitylikeShanghai,withphenomenaleconomicexpansionyearafteryear,strugglestomoverapidlyupthetable.Tobesuccessful,citesmustattractthebestandthebrightestandinfluencetheworld.Theabilitytoreacttochangingcircumstancesisalsocritical–Londonwillnodoubttakelessonsfromthedownturnandlooktoimproveitsperformance.

WORLD CITIES IN 2020 Takingalonger-termperspective–itisunlikelyinourviewthatthecurrentquartetoftopcitieswillbepusheddowntherankingsbytheemergingcontendersbytheendofthedecade. TheriskforthecurrentWesterntopperformersisreallyoneofrelativedecline.Growth,butslowergrowththanthatexperiencedintheemergingworld.Inaddition,thereistherealimpactofthecurrentbudgetarycrisis,witharisingtaxburdenandafiscalsqueeze–especiallyacuteinNewYorkandLondon. Toourmind,theopportunitiesfortheleadingemergingmarketcitiesarehuge.Theselocationswillcreatewealthatamorerapidratethantheestablishedcities.Itislikelythatovertimeintellectualleadershipwillbegintofollow. Butthisfinalrequirementforrealpowerisnotguaranteed–withoutitthecolossusesoftheEastwillallowrelativeminnowslikeBerlin,TorontoandBrusselstodominateininfluencingandshapingideasandevents.

THE WEALTH REPORT

MONITOR Knight FranK World Cities sUrVeY 2010

35 }

Inthis,thesecondeditionoftheKnightFrankGlobalCitiesSurvey,LiamBaileyreportsonthewinnersandlosersemergingfromtheaftermathofthecreditcrunch,anddiscoversthattheshiftinleadershipbetweenglobalcitiesismorenuancedthanthesimplewest-to-eastnarrativewouldatfirstsuggestLiamBaileyisheadofresidentialresearchatKnightFrank

HOWTOMEASURETHEWORLD............ paGe 36THETOP40CITIES................................... paGe 37THETOP10CITIESKEYFEATURES....... paGe 37EYEWITNESS.............................................. paGe 38



QL

EA

KI

1

KI

EA

2

3

PP

QL

PP

3

EA

4

EA

LA

KI

KI

5

Brussels

PP

PP

6

EA

EA

QL

7

PP

QL

8

Beijing

QL1

QL2

PP

9

toronto

QL

10


HOW TO MEASURE THE WORLDIn our attempt to create the most rounded assessment of the locations that matter to the global tribe of footloose wealthy and influential, we built on last year’s survey methodology. Once again we have considered much more than each city’s share of world financial flows and economic activity, and have been exercised by the need to assess political influence, intellectual activity and, critically, liveability*.

As before our assessment is divided into four themes, with each city ranked from one (weakest) to 40 (strongest). Aggregate rank determines the final position in the survey.

ECONOMIC ACTIVITYFirstweconsidereconomicactivity–includingeconomicoutput,incomeperhead,financialandcapitalmarketactivityandmarketshare,togetherwiththenumberofinternationalbusinessheadquartersineachcity.

POLITICAL POWERBroadernon-economicinfluenceiscapturedbyoursecondmeasure,whichwelooselylabel“politicalpower”.Herewecalculatetheimportanceofeachcitytoglobalpoliticalthoughtandopinion,identifyingwherepowerisheldandinfluenceexercised.OurrankingincludesthenumberofHQsfornationalpoliticalorganisationsandinternationalnon-governmentalorganisations,togetherwiththenumberofembassiesandthinktanksineachcity.

KNOWLEDGE & INFLUENCENextweconsidereachcity’sknowledgebase–assessingeducationalstatusandthenumberandrankingofeducationalfacilities.Wethenconsiderhowwelleachcityisabletotransmitthisknowledge–byassessingthenumberofnationalandinternationalmediaorganisationsandnewsbureaus,andtheinternationalmarketshareoflocallybasedmedia.

QUALITY OF LIFE Finally,weassessedthequalityoflifeofferedbyeachcity.Therangeofissuesconsideredwasextensiveandincludedmeasuresofpersonalandpoliticalfreedom,censorship,personalsecurity,crime,politicalstability,healthfacilities,publicservicesandtransport,cultureandleisure,climateandthequalityofthenaturalandman-madeenvironment.

THE WEALTH REPORT


23 }

CitY

CitY

CitY

CitY

2010

Po

siti

on

2010

Po

siti

on

2010

Po

siti

on

2010

Po

siti

on

2009

Po

siti

on

2009

Po

siti

on

2009

Po

siti

on

2009

Po

siti

on

Posi

tio

n C

han

ge

Posi

tio

n C

han

ge

Posi

tio

n C

han

ge

Posi

tio

n C

han

ge

THE TOP 10 CITIESKEY FEATURES

3 PARISPPTheOrganisationfor

EconomicCo-operationandDevelopment–headquartersofthisinternationaleconomicorganisationof30countries

qL TheLouvre–themostvisitedmuseumintheworldhouses380,000objects

4 TOKYOEA TheTokyoStockExchange

–thesecond-largeststockexchangeintheworldbyaggregatemarketcapitalisationofitslistedcompanies

EA GreaterTokyoArea–theworld'smostpopulousmetropolitanareawith37mpeople

5 LOS ANGELESKI Hollywood–thecentreofthe

world'slargestfilmindustryKI TheUniversityofCalifornia,

LosAngeles(UCLA),enrolls26,000undergraduatesand11,000graduatestudentsfromtheUnitedStates

6 bRUSSELSPPEUheadquarters–Brussels

servesastheinformalcapitaloftheEuropeanUnion

PPTheNorthAtlanticTreatyOrganization(NATO)–HeadquartersofthismilitaryalliancebasedontheNorthAtlanticTreaty

7 SINGAPOREEA PortofSingapore–oneof

thebusiestportsintheworldEA CBD–Singaporeisthe

world'sfourthlargestforeignexchangetradingcentre

qL TheSingaporezoo–oneoftheworld'sleadingzoos–occupying28hectaresoflandonthemarginsofUpperSeletarReservoir

8 bERLINPPReichstag–following

NormanFoster'sreconstruction,theGermanParliamentreturnedherein1999

qL MuseumIsland–thenorthernhalfoftheSpreeinselinthecentreofBerlin.Theislandreceiveditsnameforseveralinternationallyrenownedmuseumsthatnowoccupythisarea

9 bEIjINGPPTheGreatHallofthePeople

–locatedatthewesternedgeofTiananmenSquare,usedforlegislativeandceremonialactivitiesbythePeople'sRepublicofChinaandtheCommunistParty

qL TheTempleofHeaven,literallytheAltarofHeaven,acomplexofTaoistbuildings

qL BeijingNationalStadium–colloquiallyknownastheBird'sNest,thestadiumwasdesignedforusethroughoutthe2008SummerOlympicsandParalympics

10 TORONTOqL LakeOntario–symbolicof

thecleanairandoutdoorlifestyleenjoyedinCanada'slargestcity

1 NEW YORKEA WallStreet–heartofthe

USfinancialservicessectorqL MeatPackingDistrict–

up-and-comingresidentialzone

KI NewYorkUniversity–thelargestprivatehighereducationinstitutionintheUnitedStates

2 LONDONEA TheCity–London's

traditionalfinancialcorewhichtogetherwithCanaryWharfcreatesEurope'slargestfinancialcentre

KI TheBritishMuseum–housesoneofthelargestandmostcomprehensivecollectionsintheworld

PPTheHousesofParliament

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2010

Po

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THE TOP 40 CITIES

4039373831263619332430103235292820223416112527231314

86

12172115

118

325794

39363534253826293719224023

915

7172824

131102720331330322112

42

16111814

6835

40393736352734262431333223381530252213281618111219

8142017

92921

456

101732

32354036313023391938262925143727281112341822

817

53315

61321

42024

910

316

172

151149149144122121119113113112111111103969692908383797675737270686764635958584543372928232213

2134567

1312

810

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+1-1

-----

+5+3-2-1-3-2

--

+2-1-1

+2+2-2-2

+3-

-2-1

-+2

-+1-3

-+2

--2

-----

1 NEW YORK 2 LONDON 3 PARIS 4 TOKYO 5 LOS ANGELES 6 bRUSSELS 7 SINGAPORE 8 bERLIN 9 bEIjING 10 TORONTO 11 CHICAGO 12 WASHINGTON DC 13 SEOUL 14 HONG KONG 15 FRANKFURT 16 SYDNEY 17 SAN FRANCISCO 18 bANGKOK 19 SHANGHAI 20 ZURICH 21 MExICO CITY 22 MOSCOW 23 TAIPEI 24 SAO PAULO 25 ISTANbUL 26 MUNICH 27 bUENOS AIRES 28 CAIRO 29 MIAMI 30 MILAN 31 DUbAI 32 bOSTON 33 TEL AVIV 34 KUALA LUMPUR 35 bOGOTA 36 NEW DELHI 37 RIO DE jANEIRO 38 jAKARTA 39 MUMbAI 40 jOHANNESbURG

CitY

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Chan

ge

in

agg

reg

ate

ran

K

bERLIN +9 bEIjING +8 TEL AVIV +7 bRUSSELS +5 SINGAPORE +5 SYDNEY +4 SHANGHAI +4 KUALA LUMPUR +4 MUMbAI +4 bOSTON +3

CitY

FALLING

Chan

ge

in

agg

reg

ate

ran

K

bANGKOK -7 MExICO CITY -7 DUbAI -7 ISTANbUL -6 LONDON -5 HONG KONG -5 MOSCOW -5 MUNICH -5 bOGOTA -5 NEW DELHI -4

*Sourcesinclude:UN,IMF,ForeignPolicyMagazine,EIU,GlobalizationandWorldCitiesStudyGroupandNetwork,A.T.Kearney,ChicagoCouncilonGlobalAffairs,TheInstituteforUrbanStrategiesatTheMoriMemorialFoundation,Y/zenGroup

1 NEW YORK 1 - 2 LONDON 2 - 3 TOKYO 3 - 4 PARIS 4 - 5 SINGAPORE 6 +1 6 HONG KONG 5 -1 7 SHANGHAI 8 +1 8 bEIjING 9 +1 9 SEOUL 7 -2 10 LOS ANGELES 11 +1

1 WASHINGTON 1 - 2 NEW YORK 2 - 3 bRUSSELS 3 - 4 bEIjING 7 +3 5 LONDON 4 -1 6 PARIS 5 -1 7 TOKYO 6 -1 8 ISTANbUL 8 - 9 CAIRO 9 - 10 MExICO CITY 10 -

1 NEW YORK 2 +1 2 LONDON 1 -1 3 HONG KONG 3 - 4 PARIS 5 +1 5 TOKYO 4 -1 6 LOS ANGELES 6 - 7 SINGAPORE 7 - 8 CHICAGO 8 - 9 WASHINGTON 10 +1 10 TORONTO 9 -1

1 PARIS 2 +1 2 bERLIN 5 +3 3 TORONTO 1 -2 4 FRANKFURT 4 - 5 TOKYO 7 +2 6 LONDON 3 -3 7 ZURICH 10 +3 8 MUNICH 6 -2 9 NEW YORK 8 -1 10 LOS ANGELES 9 -1




///////////////////////////////////////

POLITICAL POWERbEIjING

Beijing has risen from 7 to 4 in our ranking of “political power”, but commentator Jonathan Fenby says the city will find it harder to increase its influence in other areas

the typical Beijing resident has a high regard for their city’s new-found status. the 2008 Beijing olympics was a pivotal moment in the development of a sense of civic pride and expectation for China’s capital. significantly improved middle-class housing and new infrastructure mean that Beijing looks and feels a lot more like a true global city. Beijing is at heart an imperial city – the main set-pieces of the forbidden city, tiananmen square, for example, help to define the sense of superiority the Beijing resident has over someone from the commercial hubs of shanghai or guangzhou. We should not, however, underestimate its economic ambition. the fact that much of China’s financial sector activity takes place in shanghai and hong Kong is no barrier to Beijing’s economic influence. Five years ago, if you wanted to meet the top decision makers at the top banks in China you would have travelled to shanghai, now you would be as likely to go to

Beijing. the ‘shanghai clique’, which dominated the top of the Communist Party in the 1990s, has been replaced by a more Beijing-centred leadership. in everything from trade, finance, media and power – Beijing is on the rise in China. But as the capital of a one-party state, it lacks the more chaotic creativity experienced in locations like london or new York suggesting that the democratic deficit does matter when it comes to an attempt to create a vital and vibrant city life. Public protests have become more numerous and more accepted – but only when they are seeking to address economic issues. as to whether Beijing will ever become a global leader in terms of exporting ideas and values, and attracting the world’s creative class – i am not optimistic. there is tremendous intellectual curiosity in the city – but again this is expressed at a private and not a public level. in terms of Beijing’s ambition to shape global values – i don’t see this happening. there is a lot of talk around the ‘Beijing Consensus’, as alternative to the Western democratic model for emerging economies to follow, i am not persuaded. Beijing does not want to export its values globally – China is big enough for the moment. Jonathan Fenby is a co-founder of Trusted Sources trustedsources.co.uk which provides analysis on emerging economies. He was formerly editor of the South China Morning Post.

/////////////////////////////////////////

KNOWLEDGE & INFLUENCE WASHINGTON DC

Washington DC’s cluster of influential political think tanks means it will continue to rank highly for “knowledge and influence”, says The Economist’s Adrian Wooldridge

the most important thing to understand about Washington dC is that it is unique. the cluster of universities, institutes, foundations and, most importantly, the world’s largest concentration of political think tanks, lends the city an intellectual dynamism that is wholly lacking in other world centres. every shade of opinion, from neo-conservative to left-liberal, is represented – the sheer variety of thinking is invigorating. if anything, the scale and importance of the think tank industry is actually growing, despite the economic downturn. the size of the Us government is growing and the think tanks will benefit, ironically, particularly those viscerally opposed to the concept of big government. london, where i am currently based, has arguably the world’s second-largest collection of think tanks, but it is such a diverse city that they play only a bit part in intellectual life. in Washington, ideas rule –

this is a city where walking into a starbucks you will see people poring over academic papers and discussing government debt. this is one of the most dynamic environments in the Us, but it is a one-industry city. in the same way as you don’t choose to live in la if you haven’t got at least some interest in films and celebrity, you don’t generally live in Washington if you haven’t at least some interest in public policy. things are beginning to change; increasingly it is not just policy wonks who are attracted to Washington. in recent years the city has become noticeably wealthier, and property prices have risen steeply on the back of demand from a new type of resident. it may seem surprising, but arguably Washington has now become the centre of Us finance. as the government has nationalised bank debt and taken control of Wall street, more and more senior bank staff have migrated to the city. i cannot see the emerging centres in asia aping Washington’s influence for a long time. First, and probably the hardest part for many countries, you need to have political freedom to permit debate and ideas to flourish. second you need the infrastructure of the foundations and institutions to fund the research and host the debates. in my view, Washington’s thought leadership will continue to aid the Us in extending its global influence even as its economic leadership is waning. Adrian Wooldridge is The Economist's management editor. He was previously Washington bureau chief.

/////////////////////////////////////////

ECONOMIC ACTIVITYSINGAPORE

Singapore has risen from 6 to 5 in our “economic power” rankings. International property developer Dr Stanley Quek says the city’s economic ambition is backed up by its high¯quality environment and political stability in an otherwise turbulent region

singapore has had to respond to the seismic shift in economic power from West to east over the past decade. it could also do little as Chinese entrepreneurs assessed its traditional industries and then replicated them, only on a much bigger scale and with much lower costs. the government’s response over a decade ago was to concentrate on supporting the development of economic sectors that reinforced the unique selling points offered by the city. as a result, private banking, professional and high value-added services have flourished. the low-tax environment in singapore has been a boon in the attempt to lure highly paid and highly mobile expatriate knowledge workers. another trump card for the city has been the government’s uncanny ability

to deliver on the elements which matter – it has proved to be very responsive in ensuring that infrastructure, security and transport are delivered with minimal upheaval or fuss. the immediate location in asia is rather lively. With malaysia, thailand and the Philippines as neighbours there is an ever-present risk of importing political or security problems. this fact led to the strategic shift in singapore’s foreign policy – close ties with the Us, australia and the UK are as important as ever – but China has been courted much more closely. the expansion of singapore’s economy has not been without its problems. the cost of housing has risen, and policies have been developed to try to maintain pricing levels for the 80% of the population living in government ‘affordable’ housing. Population growth has been rapid over the past five years in particular. With 5m residents now and a govern-ment policy of a maximum of 6m, i believe that we will see the island hitting its population capacity by 2030 at the latest. my view is that the “switzerland of asia” has a bright future. the continued growth of the asian economy will continue to support singapore’s service sector. With more hnWis in the region there will be more wealthy people looking to secure a second or even a first home in this city. Dr Stanley Quek is managing director and CEO of Frasers Property UK and Australasia frasersproperty.com

/////////////////////////////////////////

QUALITY OF LIFE bERLIN

Berlin is moving up our “quality of life” rankings. The city may lack the wealth and economic firepower of London and New York, but it offers a cultural environment equally as rich and influential, argues journalist and resident Gerrit Wiesmann

even two decades after unification Berlin is still a city that suffers from high unemployment and a remarkable degree of poverty. Plans in the early 1990s to shift the german stock exchange and the country’s banking headquarters to the new capital of the unified germany came to nothing. the government moved in, but the commercial bodies firmly stayed out. despite this, the city has become one of europe’s most influential centres, attracting many talented and skilled workers. the driving force for this evolution has been a decade of artistic and cultural flowering. Before the wall came down in 1989,both the West and east german authorities pampered their halves of the city – turning them into showcases to prove the success of their respective political models. if one side of the city had an opera house, then so did

the other side, leading to a legacy of institutions that gave the city double the amount of galleries, theatres, universities, museums – and oddly even zoos – than a comparable city would have required. this heritage of high-quality infrastructure combined with cheap rents for apartments and industrial premises led to the development of an alternative arts scene in the mid-1990s. the lack of a significant financial services sector means that serious wealth in Berlin is noticeable by its absence. You do not get the fashion houses, the industrial headquarters or the financial services firms you see elsewhere and government spending underpins everything. it has been a slow process, but Berlin is asserting itself, not just within germany, but also across europe. if you want to access the best young architects, designers, photographers and even writers, this city is increasingly the place to come to find talent. looking to the future you have to be positive – unemployment and poverty will not disappear in the short term, but the city’s cultural life will keep drawing in talented residents. Will the city be as vibrant and influential in 2020 as it is now? Yes. Will the city be more of a centre of trade and transactions? Unfortunately, i think not. Gerrit Wiesmann is the Berlin Correspondent for the Financial Times.

THE WEALTH REPORT


39

EYEWITNESS

|



http://www.trustedsources.co.uk

http://www.frasersproperty.com


THE WEALTH REPORT

ATTITUDES Wealth rePort 2010 attitUdes sUrVeY resUlts

High-net-worthindividuals(HNWIs)haveafondnessfortangibleassets,withpropertymakingupthelargestshareoftheirinvestmentportfolios1 .OftheHNWIswhoparticipatedinTheWealthReport2010AttitudesSurvey,property,onaverage,accountedforone-thirdoftheirassets.Only8%ofthosequestionedhadnopropertyinvestmentsatall. Europeanswerethebiggestpropertyenthusiasts,wherethisassetmadeupalmosthalfoftheirinvestments.SouthAmericanswerethemostreticent,withonlyjustover10%oftheirinvestmentsinthepropertysector. Equitiesmadeupaquarteroftherespondents’investments,withcashandbondsthethirdandfourthmostpopularinvestmentsat17%and13%,respectively.Gold,despiteitsreputationasthesafestofhavensinturbulenteconomicenvironments,stillappearsafairlyspecialistinvestmentandcanclaimonlya0.5%shareoftheaverageHNWIinvestmentportfolio. Thisdesiretoinvestintangibleandtransparentassetswasfurtherreinforcedwhenweaskedthoserespondentswithpropertyinvestmentstobreakdowntheirholdingsbyassetclass 2 .Residentialandcommercialweretheclearleaders,withanaveragecombinedpropertyportfolioshareofover90%.Agricultureandforestryinvestmentsaccountedforanother5%,butpropertyfundsandRealEstateInvestmentTrusts(REITs)werestillbeingtreatedcautiouslywithacombinedallocationofunder5%.

Withgrowthreturningtomanyassetclassesoverthepastyear,theresultsofour2010AttitudesSurveyallowustounderstandthethinkingofwealthyinvestorsandwheretheythinkperformanceislikelytobestrongin2010,asworldgrowthpicksup.Andrew Shirley,editorofTHE WEALTH REPORT, looksatthenumbers

WHERE THE

SMART MONEY GOES

Asianinvestorsheldthebiggestshareofresidentialpropertyatalmost70%,whileforNorthAmericanHNWIs,commercialproperty(55%)hadtheedgeoverresidentialbricksandmortar(40%).SouthAmericanandAsianHNWIsseemedparticularlyfondof“hard”propertyassetswithinvestmentsinpropertyfundsandREITsbarelyregisteringinthesurveyresponses. HNWIsarealsooptimisticaboutthefortunesofthepropertysector,withjustover70%ofrespondentstippingitasagoodinvestmentopportunityin2010 3 .Thestrongrecoveryofglobalstockmarketswasalsofeltlikelytocontinuewith68%recommendingequitiesasaworthwhileinvestment.Therewaslittleenthusiasmforbonds–

73%ofrespondentswerenotkeenoninvestingthisyear–whileonly38%wouldrecommendbuyingmoregold,suggestingthatmostHNWIsthinkthepreciousmetal’srecentstellarperformancehasreachedapeak. Whenasked,however,whichwouldbethebest-performingassetclassoftheyear,31%ofHNWIschoseequities,with21%optingforproperty.Hedgefundswerealsoexpectedtodowellwith25%puttingthematthetopoftheirperformancelist.Withinthepropertysector,halfthesurveyrespondentssaidresidentialpropertywouldbethestarperformerin2010,followedbycommercialproperty,whichwaspickedby30% 4 .

Which do you think will be the best performing property asset class in 2010?

4

100%

0%

50

10

30

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If you have property in your portfolio how would you say your investment is split across the following asset classes?

2

100%

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41

4 15

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How would you say your investment portfolio is distributed across the following asset classes?

1

100%

0%

YES

NO

7129

6832

2773

6733

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Do you think 2010 will be a good year to invest in these asset classes?

3




Long-term capital appreciationisverymuchtheobjectiveofHNWIswhentheyconsiderwhatpropertytoinvestin,accordingtotheresultsofoursurvey.Whenaskedtorankthefactorsthatinfluencedtheirinvestmentdecisions 5 capitalgrowthwasconsideredmostimportant,followedcloselybyassetstabilityandthenbyyields. Therewere,however,regionalvariations.Aftercapitalappreciation,yieldsweremostimportanttoHNWIsintheMiddleEastandSouthAmerica. Intermsofwheretoinvestinproperty,NorthAmericanspreferredtostayclosetohome,with88%ofrespondentssayingtheywouldspenditintheirowncountryiftheywereofferedasignificantamountofmoneytoinvest.ReflectingalackofinvestmentopportunitieswithintheMiddleEast,andpossiblyalsoconcernsarisingfromtheDubaipropertyslump,only17%ofHNWIsfromtheregionsaidtheywouldinvestthere. Whenitcomestomakingtheirinvestmentdecisions,thewealthyseemveryselfconfidentandwhentheyneedadvicewillturntotheirpeersfirst 6 . Themajorityofthosewhotookpartinthesurveyrankedtheirownexpertiseasthemostimportantsourceofinformation,withtheircolleaguesinsecondplace.SouthAmericans,however,dolookfirsttotheirpersonalbankorwealthmanager.Thehugeamountofinformationavailableonlinewasnotconsideredveryreliable,withtheinternetconsideredtheleastimportantsourceofadvice. Interestingly,despitestrongralliesbyglobalequityandpropertymarkets,whichiswhereHNWI’shavemostoftheirinvestments,thesurveyrespondentswerenotparticularlybullishabouttheprospectsfortheirpersonalwealthin2010 7 .Althoughonlyasmallproportion(4%)expectedtheiroverallnetworthtodeclineduringtheyear,just5%believeditwouldincreasesignificantly,withmostofthepositivesentimentcomingfromtheMiddleEast.Almost20%feltitwouldstayataboutthesamelevels,withthevastmajority(72%)forecastingaslightshiftupwards. SuchaviewsuggestswidespreadcautionamongHNWIsaboutthesustainabilityofthecurrenteconomicrecoveryprocess,andreflectstheviewofmanycommentatorswhobelievethatsomeassetclassesincertainlocationsmayalreadybe

overheating.Lookingatthethreatstotheirwealth,mostrespondentschosetheeconomy,eitherintheirowncountryorglobally,asthebiggestdangers.InSouthAmerica,politicalinstabilitywasmoreworryingthantheglobaleconomy,whilechangestothetaxationregimeweremoreofaconcerninEuropethananywhereelse. Despite this relatively cautious outlook, a significant number of the respondents feel confident enough to consider buying another residence this year.Ofthose,13%saidtheywereplanningtopurchaseanewprimaryresidence,while37%saidtheywouldbelookingtoacquireasecondaryhouse.Only53%saidtheywouldbefinancingtheirpurchaseswithextradebt. Unsurprisingly,thefactorsconsideredmostimportantwhenchoosingaprimaryorsecondaryresidencevary 8 & 9 .Whileviewsandclimatearetopofthelistforasecondaryhouse,securityandreputationoftheareascoremosthighlyforaHNWI’smaindwelling.Onesurprisingfactoristhatproximitytoworkplaceisnotrankedineventhetop-10mostimportantreasonsforchoosingaprimaryresidence.Thisseemstobackupthepremisethattoday’ssuccessfulHNWIislikelytobedoingbusinessgloballyandhaslessneedthaninpreviousgenerationstobenearanyoneparticularplaceofwork. The results of The Wealth Report 2010 Attitudes SurveyindicatethatHNWIsarestartingtofeelmoreconfidentaboutthefuture.Theygenerallybelievethattheywillbebetteroffattheendoftheyearthantheyarenow,butthereis,however,stillasenseofcaution.Tangibleassetsarestillverymuchtotheforeand,followingsharppricecorrectionsinmanymarketspropertyisconsideredaverydesirableassettoownandinvestin.

8 When choosing your principal residence please rank the five most important factors

MOSTIMPORTANT

LEASTIMPORTANT

FACTORS

REPUTATIONOFAREA

SECURITY

DESIGN

SIzE

PROxIMITYTOLOCALAMENITIES

vIEWS

PRICE

PROxIMITYTOFAMILY

CLIMATE

PROxIMITYTOBUSINESS/PLACEOFWORK

PROxIMITYTOWATERFRONT

TRANSPORTLINKS

ENvIRONMENTALSUSTAINABILITY

PROxIMITYTOSCHOOLS

5 When investing in property please rank the importance of the following factors

MOSTIMPORTANT

LEASTIMPORTANT

FACTORS

CAPITALGROWTH

STABILITYOFASSET

YIELD

TAxBENEFITS

ENvIRONMENTALCONSIDERATIONS

MOSTIMPORTANT

LEASTIMPORTANT

FACTORS

vIEWS

CLIMATE

REPUTATIONOFAREA

DESIGN

PRICE

SECURITY

SIzE

PROxIMITYTOWATERFRONT

OTHER

PROxIMITYTOLOCALAMENITIES

TRANSPORTLINKS

ENvIRONMENTALSUSTAINABILITY

PROxIMITYTOFAMILY

PROxIMITYTOBUSINESS/PLACEOFWORK

PROxIMITYTOSCHOOLS

9 When choosing your secondary residences please rank the five most important factors

6

MOSTIMPORTANT

LEASTIMPORTANT

FACTORS

OWNExPERTISE

PEERS

PERSONALBANK/WEALTHMANAGER

INDEPENDENTINvESTMENTADvISER

ADvICEINNEWSPAPERS/MAGAzINES

ADvICEONTHEINTERNET

When making investments please rank the importance of the following sources of advice

DEC

REA

SE

SLIG

HTL

Y

STAY

TH

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ME

INC

REA

SE

SLIG

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Y

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SE

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4

19

72

5

How do you think your overall net worth will change during 2010?

7

100%

0%

THE WEALTH REPORT

ATTITUDES Wealth rePort 2010 attitUdes sUrVeY resUlts

|43




THE WEALTH REPORT

ATTITUDES Choosing a liFestYle

Someofthemostenduringloveaffairsseemtohappenbychance,springingalmostoutofnothing,arrivinginourliveswhenweleastexpectthemorhaveevengivenuphope. ForTrudieStylerandSting,findingIlPalagio,their900-acreTuscanestatesoutheastofFlorence,wasoneofthosemoments.Itwastheculminationofasearchthathadtakensevenyears,havingfalleninlovewithItalyafterspendingthreemonthstherearoundthetimetheirdaughterCocowasborn. “Since then we’d kept dreaming of finding the perfect Tuscan property. Whenever Sting toured Italy I’d go and meet him and we’d do a few days of house hunting. So one day, I cajoled Sting into the car to look at yet more houses, but nothing was right. The ceilings were too high or the walls too frescoed. With just one house left to see, we were disillusioned and ready to give up. I really was starting to believe that what we were looking for didn’t exist,” recallsTrudie. Luckily,KnightFrank’sheadofinternationalsalesPaddyDringpersuadedthecoupletogiveIlPalagioachance,andwhatcouldhavebeenaforgottenfootnoteattheendofafruitlessdaylookingfortheperfecthouseturned,instead,intoloveatfirstsight.Hewasthematchmaker,laughsStyler.“As soon as we saw the property the whole mood changed. It went from ‘let’s go home’ to ‘we could actually be buying a house today’, there was something really special about the atmosphere it was very positive, very benign.”Astrokeofluckorsomethingmore?“I do believe that you can feel when you belong somewhere,”shesays. IlPalagiowasbuiltasahuntinglodgesotheroomsareveryhumaninscale,“a perfect place for a family to spend time together.” Buttheestatealsohadsomethingelsethatthecouplewanteddesperately–land.Landnotjusttoadmiretheviewsover,butlandtoformadeepsymbioticrelationshipwith,thekindofrelationshipthatStylerbelievesisnowlargelymissingfromagricultureasfarmersincreasinglyrelyonartificialchemicalstoboostoutputandyields. Workingwithnature,notagainstit,isakeypartofthecouple’sspiritualoutlookonlifeandexplainswhytheyarepassionateadvocatesoforganicfarming.“It’scommonsense,foodisbetterwhenfewerthingsareadded,notmore,”sheexplains.“You can just taste it.”Althoughsheclaimsnottobeahands-onfarmer,“I just don’t have the time,”theenthusiasminhervoiceispalpablewhentalkingaboutthefoodthattheygrow. SheandStingwerealreadyproducingarangeoforganicfoodfromtheir60-acreLakeHouseestateinWiltshire,England,whentheyboughtIlPalagio.Therewas,however,littleopportunitytoacquiremorelandthere,meaningthepotentialfornewprojectswaslimited.IlPalagioofferedawholenewhorizon.

IL PALAGIO

UNDER A TUSCAN

MOON

SOMETIMES A PROPERTY IS NOT JUST A PLACE TO LIVE, BUT SOMEWHERE TO MAKE A NEW LIFE, SOMEWHERE TO RE¯ENERGISE AND RE¯BALANCE. ANDREW SHIRLEY TALKS TO TRUDIE STYLER ABOUT IL PALAGIO, THE ITALIAN HOME WHERE SHE AND MUSICIAN HUSBAND STING SPEND MUCH OF THEIR TIME, AND THE IMPACT IT HAS HAD ON THEIR LIVES




THE WEALTH REPORT

ATTITUDES Choosing a liFestYle

iskeytobiodynamicfarmingandtheearthisreinvigoratedandcleansedwithspecialnaturallyenrichedandfermentedcomposts,manuresandsprays.Growingcyclesarealsooftenalignedtothemoon’sphases. Stylerbelievesthiscontroversial,butincreasinglypopulartechnique,deservesawideraudienceandhopesthatthewinefromIlPalagiowillenablemorepeopletoshareitsbenefitsandencourageotherstoadoptasimilarapproach. Fittingly,thenewwinewillbecalledSisterMoon,reflectingnotjustitsmethodofproduction,butalsothetitleofoneofSting’ssongs.Althoughconventionalfarmersarescepticalaboutbiodynamics,StylermaintainsthatitimprovesthetasteofthewineaswellasthehealthofthesoilandhashelpedmaketheatmosphereofIlPalagioevencalmerthanitwasbefore.“I have noticed a difference since the soil was cleaned, I just want to stay there.” TalkingtoStyler,itisclearthatIlPalagioisnotjustahousetoher,Stingandtheirfamily,butalsoawayoflife.Whiletheymayhavebreathednewlifeintoanoldestatewiththeirsympatheticrestorationofthehouseandrejuvenationofitsfarmland,ithasalsoclearlygivenalotback.MuchofSting’smusichasbeencreatedontheestateorbeeninspiredbyit,shesays,addingwistfullythatitcouldbetheplacetheyretireto.“It’s a house we are still absolutely head over heels in love with.”

Sincebuyingtheestate13yearsagofromalocalDukeandgraduallyacquiringbacksomeofitsoriginallandthathadbeensoldoffovertheyears,StylerandStinghaveproducedaward-winningvirginoilfromitsolivegrovesandgarneredprizesforthehoneytheycoaxfromits75“families”ofbeeswiththehelpoffarmmanagerPaoloRossi. RossiandhissisterBina,whorunsthehouse,wereborninIlPalagioandtheirpresence,saysStyler,bringsacalmingsenseofcontinuitytotheestate,aswellasmaintainingarelationshipwiththelocalcommunitythatbothsheandStingbelieveisvital. Thisyearorearly2011willseetheculminationoftheirbiggestprojectyet.Around30,000bottlesofaSuperTuscanMerlotthatisshapingupwellarecurrentlymaturinggently,readytobereleasedontothemarket. Itcouldbeseenasagamble.SmallItalianproducersarestrugglingtocompetewithcheaperwinefrommuchbiggerwineriesintheNewWorld,butturningaprofit–andsheadmitsitwillonlybeasmalloneifanything–isjustoneoftheproject’saims,saysStyler.ThewinefromIlPalagioisproducedinaverydifferentwaytomostwinefromTuscany,or,indeed,anywhereelse. WiththehelpofconsultantAlanYork,whoalsoconvertedtheBenzigerFamilywineryinCalifornia,thevinesaregrownusingbiodynamicagriculture,asystempioneeredbyRudolfSteinerintheearly20thCentury.Treatingthesoilasalivingorganism

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