Although the property market as a whole remains highly uncertain, high net worth investors will continue to see the asset class as an important part of their portfolio. Among the 2000 high net worth investors surveyed for this report, the average portion of their portfolio allocated to property is 28 per cent, excluding their main residence. Of course, there is no one “right” allocation to property for all investors. An investor’s own ideal position will depend on a host of factors, including their investment horizon, risk appetite, location, time of life and personal preferences. Property experts questioned for this report express a range of opinions about allocation. Basil Demeroutis, a Partner at Capricorn Investment Group (a multi-family office started by the co-founder of eBay), suggests an optimum figure of between 6 per cent and 8 per cent, while Laurent Nouvion, who runs the Nouvion family office in Monaco and has a strong preference for property assets, holds up to 50 per cent.
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“There is no doubt that a certain amount of property can provide return enhancement and diversification benefits in most investors’ portfolios,” says Philip Jeffcock, Real Estate Director at Barclays. “The proportion of wealth allocated to property should be reasonable given an investor’s liquidity requirements, and their ability to deal with the possibility that they might have to sell an asset with poor liquidity when things go bad.”
The average allocation to property of 28 per cent among the survey respondents conceals considerable variation in allocations across geographies. Spanish investors, for example, have the highest levels of property holdings out of the ten focus countries for the survey. On average, they allocate 51 per cent of their portfolio to property, while 59 per cent have allocations to property of 50 per cent or more. Spain has long had a strong cultural affinity with property ownership and the government offers generous tax relief on mortgage payments. It has also been a mecca for foreign investors and speculators, especially during the housing boom of 1995 to 2007, which saw prices rise by 300 per cent.
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What is your current approximate allocation to real estate in your overall investment portfolio (not including the primary property in which you live)?
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Investors from Switzerland have the lowest average allocation to property, at 17 per cent, and only 14 per cent have allocations of 50 per cent or greater. Those from the US and Monaco also have relatively low allocations at 23 per cent. In the case of Switzerland and Monaco, which are both long established property markets, there is some evidence that more experienced investors stayed out of the market as prices soared. “Although we have been investing in property for some 50 years, we stopped investing in 2006 and 2007,” says Mr Nouvion. “Prices were simply far too high. They had lost all sense of reality.”
The survey suggests that, in general, allocation to property increases with wealth. For example, investors with assets of greater than £30m have an average allocation to property of 37 per cent, compared with 36 per cent for those with wealth between £10m and £30m, 31 per cent for those with wealth between £1m and £10m, and 23 per cent for those with assets between £500m and £1m.
What is your current approximate allocation to property in your overall investment portfolio (not including the primary property in which you live)?
It is important that investors hold a range of asset classes, not just property, in order to have a diversified portfolio. Diversification is important for two reasons. One, it is difficult to predict which asset class will be the best performer each year, as seen in the chart below, so investors should hedge their bets. And two, some asset classes returns are more closely correlated than others – meaning their returns tend to go up and down together – so it vital that investors have asset classes with differing characteristics that will outperform in different market conditions. Diversification helps raise returns for a given level of risk.
Unpredictability of asset class rotation
Property has generally been considered to have a low correlation with both equities and bonds, although correlations do fluctuate slightly over the course of an economic cycle. However in the financial crisis of 2008 and the subsequent economic downturn, correlations spiked and many asset classes experienced substantial losses. So, while diversification can help lower risk over the long term, in short-term crises there is still the potential for many asset classes to suffer at the same time.