The Big Money Conversation with Lord Andrew Hay of Knight Frank Wealth Division
Lord Andrew Hay, Global Head of Knight Frank Residential serves up opinions on where the smart money is headed in real estate and other luxury assets
In terms of big money movements, art tops the list for 2019. Portrait of an Artist (Pool with Two Figures) by David Hockney was sold by Christie’s for US$90 million, the most expensive work by a living artist. Classic cars were in on the action as well with RM Sotheby’s 1962 Ferrari 250 GTO hammered for US$48.4 million, the most expensive car sold at auction. A 1970 Rolex Daytona “Unicorn” was sold by Phillips with Bacs & Russo for US$5.9 million, the most expensive watch sold at auction in 2018. These eye-watering new records provide general hints as to where high net worth individuals are putting their money but do they really paint an accurate picture? LUXUO caught up with Lord Andrew Hay, the Head of Knight Frank’s Wealth Division for a frank discussion on the world’s big ticket items.
LUXUO Exclusive: The Big Money Conversation with Lord Andrew Hay of Global Head Knight Frank Residential
Despite 2018’s slowdown, with an average prime price of US$4,251 per sq ft (US$45,760 per sq m), Hong Kong retains its position as the world’s most expensive big city market. And as buyers become increasingly more global and far more transient they expect lifestyle support akin to the services found at the five-star hotels in ‘lifestyle cities’ such as London, New York, Hong Kong and Singapore, seeking prime, super-prime and ultra-prime developments in these ‘lifestyle cities’. Knight Frank’s Lord Andrew Hay dishes on the investment value of real estate, art, classic cars and of course, the rising new asset, timepieces.
Based on the odd confluence of having unpredictable world leaders, Brexit on the horizon and the trade war, as well as the looming Chinese debt bubble, how does this influence real estate market? Some countries have outright banned Chinese investors from buying local properties. Is the property market coming to a head?
I’m completely confident that property will remain a safe asset if only because it is real, exists and can produce a yield but there are certainly repercussions to markets depending on one nationality. It’s a mix of domestic demand and global demand, and if you put all your eggs in the China basket, it’s not going to work. Our job as agents is to have a global network so our clients have access to buyers from all over the world. In London alone, we dealt with over 70 nationalities last year, there, the Russian market dried up almost overnight but we still had another 69 nationalities to cover the gaps in demand, it’s a much healthier market. Affordability is very important of course and even cities like New York are cooling, not dramatically because demand around the world remains high. I don’t see one singular critical moment affecting this. Perhaps a trade war might but the fact is it’s in no one’s interest beyond the rhetoric. I believe governments have to look into affordability and building more houses.
With tightening capital controls in China, do you think that will affect global demand adversely?
It has an impact for sure but there are other markets, what we have noticed with our research is that they have yet to get the balance right, how much capital is retained within China and how much is spent outwards. It appears that they have closed the doors too tightly and so you get huge property inflation in places like Shanghai and Guangzhou have gone up 28% to 36% and it’s unsustainable and a real worry. So they relax it but too much money leaves and then closed the doors again. China hasn’t got the balance yet, they have a massive affordability problem. In the UK, the ratio between average house price and salary is 14. In China, it’s 36. It’s unsustainable and they have to address it.
Do you feel that reducing the cost of property is something governments should take responsibility for or private developers?
I think governments have to help. It’s not helped by massive building costs globally but they can do it with tax breaks and funding. Unfortunately, what’s happened since the global financial crisis is that a lot of mainstream banks have withdrawn from property development funding and therefore, the financing model has not been reinvented or changed, that’s not working at the moment.
Speaking of funding models, Singapore has pioneered this scheme where public housing has become a quasi-asset, do you think that’s sustainable?
I think it’s a really interesting model and it’s begun to be looked at around the world. This “build to rent” and multi-housing thing is something experts feel would become the next asset class within the next decade. It would be a potential breakthrough for affordability.
In the Singapore context, there are two sides of the argument here – one is that at the end of 99 years lease, the value is zero The other is the hope, that a government which wants to stay in power would not allow that to happen. The thing is you can’t make investment decisions on best hopes. In terms of an asset, does Singapore public housing have the property of being property?
I think it does. Singapore is one of the best places in the world to live in and do business. Real estate is in short supply, as an asset class, it’s going to be successful. I believe the government will adjust things when a property hits the 50 or 60 year mark of its 99 year lease.
Sentosa Cove, traditionally one of the premier districts in Singapore has taken a beating, down 26% in value, will that spill over into the rest of the market?
It will certainly affect sentiment but I wonder how this will look over a 10 year period. In London, people are in an uproar over how the market has dropped 15% but the fact is that it went up 80% since 2010, so they’re still 65% ahead. People are very short term now when they really need to take a long term view. It’s the same with the world’s equity markets, you should look at the long term because all these markets do recover and real estate is more robust than most.
In terms of UK real estate values, will there be a difference whether it’s a hard or soft Brexit?
I think there are number of answers to this question whether it’s the commercial or residential market. I think the residential market is doing incredibly well, being driven by the value of the Sterling. What appears to be happening is that corporately, people are making one set of decisions but privately, those same CEOs and chairmen are doing something privately. So real estate volumes are down 30% on uncertainty. Soft Brexit, the market will have a bounce and before that people can see profit-taking opportunities where values or foreign exchange are at their lowest and they take advantage of those opportunities. There are lot of people waiting for that. A hard Brexit will be really tough, commercially a lot of corporations will re-orient themselves.
I’ve been getting many emails about record-breaking residential real estate transactions being done in the UK, where are all these buyers coming from? They’re not locals are they?
It’s extraordinary. I’ve been doing this for 37 years but in the last two months, i’ve never seen so many super prime deals taking place around the world. It looks like globally, the world’s super rich are making heavy investments into property. In London, at the very top end of the market, it’s quite strong. It’s a safe place to live and a great place to study. It’s the mid market that is finding it a bit tough.
Is there any data that ultra high net worth individuals are investing in property to the exclusion of other asset classes because it’s a safer asset?
I don’t know but one thing is for sure, there are fewer keeping money in the bank because interest rates are so poor. This has been a huge change in the last 10 years, coupled with quantitative easing and money being printed left and right, there’s a set of circumstances we’ve never been seen before. There’s a lot of cash in circulation. The funds previously looking only at commercial properties are now looking into residential properties, so this another huge change. Right now, there’s a growing number of funds getting into alternative asset classes as well.
Given the exuberance of the luxury watch market, why haven’t they grown in stature similar to art and classic cars?
Based on a number of things – supply and demand? People own cars for a number of reasons, some of the things which go up like racing model Aston Martins for example, are produced in runs of less than 10 examples, so its a really finite market. There’s the pride of ownership but they’re also great fun, owners go to the Goodwood festival of speed in England and there are also guys racing these $20-30 million dollar classic cars on the track with all the passion and adrenaline, all that goes into the mix. That said, classic cars have yet to hit the high spot. When you think about it, the Chinese have gone into the wine market and they haven’t gotten into the classic car market. When they do, we’re bound to see some peaks in the industry for the really exclusive models.
Paul Newman Daytonas have been accruing insane values and art even more so, I’m referring to the Salvatore Mundi, is this something that is emblematic of how passions overtake logical objectivity?
To a degree, yes. I think the art world is a very interesting one, they are all completely unique pieces. It’s not a market that is regulated which is I think is interesting. It is also incredibly mobile, so I think that brings a completely unique dimension without a doubt. But in the art market, tastes change really quickly as well, more so than watches. The great watch brands have always been great and the great classic car brands have always been great. But the great masters come and go, some even drop off the radar. With the art market, one requires tremendous expertise.
Speaking of expertise, I’ve made the argument that for a watch, you can trace its date of manufacture and when it left the factory, but with something like Leonardo’s latest discovery, it’s a little bit questionable because there are experts who can point out reasons for why the work is most likely executed by one of Leonardo’s apprentices rather than by Da Vinci himself. Some critics even point out details missing from a typical work of Leonardo Da Vinci, so how does the investor make an informed decision on an art piece which doesn’t really have verified authenticity the way a timepiece does?
It’s not as precise as a watch’s provenance for sure but I think there are a number of proven approaches with authenticating a work of art. One of my great friends, Philip Mould runs a program called Fake or Fortune and people send him pictures of Rembrandt or Picasso with the dates etc, and although you can get a comprehensive piece of historical research and they can authenticate it, there is still doubt. You really need to know what you’re doing in the art market.
Please indulge a cynical view for a moment, aren’t the appraisers themselves, being so closely associated with a piece, have an intrinsic need to say “yes this is authentic”?
I think if anything, they’re really robust in their examination. They can make mistakes for sure, but they’re still more closed in their thought process than they are open. In fact, they turn more things away than they give their approval. Not everything goes through that rigorous process though.
They’ve run out of the Hibiki 17 in Japan, do you see whiskies headed in the same direction?
[Laughs] I know a bottle which just sold for GBP 850,000 (bottle of Macallan). That said, I’m biased, whiskies from the Isles are the best but their supremacy is being challenged all over the world now with so many international producers It does seem self-sustaining. [Laughs] Gin is coming up in London for sure, there are over a hundred different gins in a bar and many from local producers, so I don’t know if it is a trend that will endure.
Is climate change going to affect the value of someone’s whisky holdings?
I think climate change is going to affect wine before its going to affect whisky. Whiskies are produced in more temperate climates but wine is much more sensitive. Sunlight and temperature can alter the properties of wine more dramatically than whisky. In fact, some of the great French champagne producers have been buying up land in England for a worst case climate scenario.
When dealing with collectible items like art and classic cars there’s a lot of passion in it, how does one remain objective when picking an item to invest in?
To a degree, the beginner who just had a big wealth changing event in their lives, I have seen them go enthusiastically into the market but they’re not quite shrewd in the quality that they buy but quickly through their mistakes, they quickly become knowledgeable and some even as knowledgeable as the experts. Some of the classic car collectors have extraordinary knowledge and end up controlling the market when combined with their enormous purchasing power. That thirst for knowledge is driven by passion. To be good at anything, you have to have passion.
What’s your opinion on the Banksy debacle when his work was automatically shredded at the last hammer?
I feel it increased the value of his work. It’s an extraordinary coincidence what happened. The art world is a funny one but just how well regulated is it? This makes it very interesting and very challenging.
There were articles by Vice and Vox showing that art houses and galleries around the world colluded to increase the value of certain artworks around the world. If that’s true, does it still make it a safe asset as the Knight Frank Wealth Report asserts?
Well… which markets do you believe are not manipulated? There are lots of things that players can do to influence a market in their favour. So you either have to have get an expert’s advice or become an expert yourself.
In 2016, Forbes wrote an article about how the Chinese debt bubble is primed to burst at any moment, others say that it won’t burst because the Communist Party would not allow it. What are your opinions on this?
I agree that the Communist Party would have to manage it and they’ve proven to be very good at managing things. It’s the same reason why i’m sure there won’t be a trade war because they simply cannot afford to have one. They will sort it all out.
What’s your take, based on current market conditions, what’s going to be the new normal?
Growth is slowing and becoming normalised. New York is slowing, London is slowing. Hong Kong has slowed. Singapore picked up and slowed again. These are normal cycles. Paris has picked up but at a low rate. Berlin looks incredibly safe and bizarrely, it’s the new safe haven of Europe. There’s nothing too dramatic even if Australian media are talking about falling values like its the end of the world. Historically, Australian property has picked up tremendously, Sydney wasn’t even in the world’s top 20 cities ten years ago and now they’re in the top 8 even with a 10% downturn.
With countries leaning towards nationalist tendencies, will further tightening of capital controls which will then affect the global real estate market?
Yes, definitely. This is what makes it difficult for an investor or agent with a global strategy, you can see what’s happening with interest rates and economies but world leaders can change their minds on a whim and everything grinds to a halt. I think our job as agents is to set up a network for our clients so we are always capturing a market somewhere.
A few agents came to prominence for adopting cryptocurrencies for real estate transactions, it’s a good tool to get around capital controls, will this become the new normal in the next 10 years?
I don’t think so and I really hope not. I don’t think governments will allow it. I’m amazed it has gone on as long as it has. Our research has shown that as an asset class, people were going to increase their exposure to it by 14%, I’m amazed. It has dropped dramatically and government wanting transparency around the world and cryptocurrencies completely contradict that. Controls are coming.
What are the top locations for ultra high net worth?
People worth more than $50 million go for London, New York and Hong Kong. Beyond that, Singapore, Los Angeles, Sydney. I don’t see that changing. Great quality of life, rule of law, safe, transparent and unless something very dramatic happens like in Vancouver which has ramped up acquisition tax which essentially killed the market. New entrants are rare, Dubai has yet to become a super prime market, it is a great place but it lacks key ingredients like lifestyle and education.
Trends in luxury spending, where do you think the wealthy will put smart money on?
I think it’s interesting that as governments push for more transparency, the art market has gone on for as long as it has. Good wine, classic cars and watches, have huge potential because of the huge growth in wealth at the top tiers. If I had to bet on one, it would be classic cars simply because China hasn’t woken up to it yet. It’s got all the provenance of a watch thanks to serial numbers and records. There are companies making spare parts for cars from 80 years ago. I know one house in England owned by a Middle Eastern family which has parking for 130 cars under the house.
Lots of people are buying real estate with their cars in mind. There’s a scheme in the UK about the begin where developers are building race tracks with a servicing centre and motor museums and beside them, mansions, so people can go in for the weekend and have a great time over the weekend. Your car has been serviced and ready to race and then you hand it off to the mechanic when you’re done.