Real assets including raw land, art, antiques, fine wine and antique cars are attractive to emerging wealth. But the factors affecting value growth of each are vastly different.
In late 2011, even while dealing with the after-effects of the 2008 financial crisis, the interior minister of Iceland rejected an application by a Chinese billionaire to purchase 300 square kilometres of land. The property was landlocked, and the investor claimed he wanted to build a golf course, but its close proximity to deep-water ports worried the Icelandic government. The minister said their weak currency crisis made them vulnerable to a “fire sale” acquisition, which they did not want to do.
What was going on here is actually related to a lot more than a rocky outcrop in the North Atlantic. Chinese investors are using their new money to buy up property and strategic land everywhere – in London, in Africa, Singapore, New York and around the world. But they are also buying art, antiques, rare coins and fine musical instruments, among other real assets. Each category is increasingly seen as an advantageous complement or alternative to market-traded securities, given the recent volatility and poor performance of stocks, bonds and new-to-the-UK real estate investment trusts (REITs).
How those assets have performed for investors is a mixed lot, although all did well. FT.com (Financial Times online) reported in February 2013 that individuals of high net worth have driven the market for all kinds of rarities and collectibles, including gold. Citing the Knight Frank Passion Index, a performance measure of fine art, classic cars, watches, stamps, coins and fine wine in the 2002-2012 time period, price growth for these assets is reflected as follows:
Asset 10-year price appreciation (%)
Classic cars 395
Rare coins 248
Residential property* Hong Kong 221
Residential property* Sao Paulo 211
Fine art 199
Fine wine 166
Residential property* Paris 117
Residential property* London 103
Residential property* New York 72
*All residential properties are upper-end
The FT.com article reports that 64 per cent of Chinese millionaires are collectors, which tends to boost prices of real assets. In classic supply-demand dynamics, the addition of thousands of investors from the BRIC sector (Brazil, Russia, India and China, where high-net worth households are growing fastest) drives demand and therefore higher prices for these finite-quantity goods.
FT.com also notes that with property investments, the largest cities have the natural upper hand. They are great places to live and regardless of where you grow up, you know where London is – as well as New York, Hong Kong, Paris and Sao Paulo, etc. But the children and grandchildren of investors in these well-known cities might be more adventurous, taking their money to invest outside of London, for example, “expanding as far as Richmond, Putney and even to the Docklands,” says the writer.
What should be noted, however, about comparing these different types of real assets is that the value of most is determined by factors outside the control of the investor. When a wave of interest in gold watches somehow washes over BRIC millionaires, for example, the price appreciation might double and triple in a year or two. Reportedly, Chinese wine collectors had a love for Chateau Lafite – until they didn’t. This led to a 19 per cent drop in price between 2011 and 2012.
Raw land investments, as with most real estate, defy strict apples-to-apples comparisons. Where land was developed before, during and after the economic crisis, are large variables. But agricultural land in England trebled in the decade preceding 2012, with the average currently more than £6,000 per acre.
Built real estate offers some opportunity to increase its value when an owner improves it or perhaps conjoins adjacent condominiums or buildings – although, that can decrease the value/square foot in many instances. Un-built property, raw land, can increase in value when local planning authorities can be convinced that development (typically, providing badly needed housing) will be a net benefit to the existing community. Fine wine, classic cars and rare stamps in comparison cannot be rezoned.
Potential investors in real assets need to be sure their investments are complementary and balanced within their portfolios. All investments should be made with input from an independent personal financial advisor who can access expertise on traditional and non-traditional assets for their investment potential.