Much is currently being made of the potential windfall that will accrue to property values as international focus and attention grows on the 2010 Soccer World Cup.

That the event will have enormous impact on the South African economy is beyond question — before, during and long after the final whistle.

There will be immediate bounty — hundreds of thousands of fans, officials, journalists and hangers-on all spending welcome foreign exchange on accommodation, travel, mementoes, food and drink and, of course, entertainment during the course of international soccer’s premier spectacle.

Already interest by foreign investors looking to buy guesthouses and B&Bs is stepping up.

Overseas buyers

Looking at the longer term, the World Cup has created a spotlight on South Africa which will increase in intensity through the months and years leading to the kick-off in 2010. This light is already shining – with a steady flow of overseas buyers of prime residential property being reported.

However, the numbers are not in the range of the heady days of a few years ago when foreign-buying activity evoked a wave of xenophobia. This has sensibly blinked off the radar screen.

Once more, foreign buyers are back — and their numbers will increase. The fact is that 2010 or no 2010, South Africa is a desirable place with the beauty, climate and infrastructure in which to have a home. Furthermore, prime residential property is still relatively inexpensive by world standards.

However, we are catching up. A recent survey by the United Kingdom’s Citi Private Bank and Knight Frank on prime international property places Cape Town twenty-third in its league table of prices of prime property in urban locations — just behind Manchester and Edinburgh and ahead of Brussels, Prague, Delhi, Beijing, Shanghai and Kuala Lumpur.

International boom

The average price of houses in the luxury segment of the South African residential house market has increased by 113 percent from the first quarter of 2000 to the first quarter of 2007.

The boom in international prime house price growth is illustrated in even more dramatic terms by the Knight Frank/Citi Bank survey’s table on prime market performance (capital growth, rental growth and gross yield). Here Cape Town comes fifth in the top 10 with growth of 37.4 percent. Heading the log, incidentally, is St Petersburg with 95.2 percent — illustrating the extraordinary growth in Russian property prices.

What one must realise is that the world is slap-bang in the middle of an international cash boom, brought about by the concentration of wealth and the growing number of high net worth individuals (HNWIs). Beneficiaries of this phenomenon have been global equity and property markets — also hard assets such as art, antiques, gold, gems and luxury goods.

Positive about property

In other words, the wealthy have become even wealthier. Illustrating this trend, says the report, is the fact that the top one percent of households (by wealth) in the UK have increased their share of national income dramatically in recent years, from a low six percent of national income in 1978 to 13 percent in recent years — not far short of the 15 percent seen in the United States.

Citi Investment Research uses the word plutonomy to define countries where the wealthy have a disproportionate slice of economic wealth. Obvious plutonomies are the UK and the United States. Russia, says the bank, is the classic emerging plutonomy and China and India are following closely.

HNWIs are positive about property. They view their residential portfolio as an opportunity for lifestyle enjoyment. They are more aggressive in their investment strategies and are likely to have exposure to a range of alternative investments (hedge funds and private equity projects). One key difference between HNWIs and other investors is this attitude towards risk and reward.

International properties

“The results of our report,” says Liam Bailey, head of residential research, “clearly indicate that HNWIs have a higher than average weighting in residential property, with the majority being in prime markets.

“Their portfolio is internationally diverse. They are happy to invest in emerging economies and are open-minded to alternative investment locations.”

An important point made by the report is that while the wealth of HNWIs grows, so does the cost of their desired property, goods and services. It has never been so expensive to be wealthy. As they make greater efforts to maintain the growth of their wealth, HNWIs try to keep ahead of the market — either by bidding up prices to remain exclusive (London, for example) or by exploring new areas (such as South Africa or Brazil).

And what this pushing at the edge means is that where HNWIs go in terms of location and property types, the rest of the market will follow.

What we in South Africa can draw from this is that there is no need to doubt whether prime residential property prices will continue to grow — they will! For example, in the UK, mainstream property values have risen by 490 percent over the past 23 years, but the prime central London residential market has increased by 680 percent over the same period.

Limited supply

Another example of how the wealthy love to spend, and thus push up prices, is the Forbes Cost of Living Well Index. It shows that in the US in the three decades to 2006 general prices rose by a little over 250 percent. Over this period, luxury prices rose by 630 percent.

Some goods become more desirable the more expensive they are. Such items are called “Giffen goods”. For many, property is the ultimate Giffen good, says the report.

“It is limited in supply and has a low price elasticity, meaning that supply does not rise and demand does not fall significantly in reaction to higher prices. The ability of the wealthy to spend more money on property is being acted on and it has coincided with a desire to secure more properties in the form of additional second homes or investments.”

So what drivers underpin the HNWI’s decision to buy a prime residence or a second home (or both)? The purchase has to satisfy:

• Time poverty: The one thing that cannot be bought is time. Convenience and accessibility are key motivators; also access to leisure pursuits.

• Luxury: There is a real, almost tangible, sense of luxury attached to very highly priced property. This quality increases continually with price. It doesn’t matter how expensive a property is, another more expensive either exists, or will in the future.

• Prestige: This quality is arguably one step above luxury. Also, privacy can be a mark of both luxury and prestige. Together with time, it is one of the most significant issues for HNWIs.

The report continues: “We believe that the quest for exclusivity will see increasing purchase activity in locations much further afield. Brazil is a newly emerging location (as is South Africa).”

Research indicates that there could be a quadrupling of overseas second home ownership within the next 10 to 15 years. Exclusivity will drive the demand for locations such as those only served by private jet. Formerly off-pitch locations will also find new appeal.

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Published courtesy of Intellectual Property Magazine.

The desire for traditional hunting, fishing and shooting estates is now being exceeded by more eclectic activities — an example being the growing interest in properties with olive groves, as has been the experience in the Western Cape.

Comments the report: “An entire industry has grown to provide services to repair, prune and re-establish olive groves, allowing the owner to create bespoke unfiltered extra virgin olive oil. For many HNWIs this is a more realistic and less time-intensive option, compared to the Herculean task of establishing a small vineyard.”

Furthermore, green issues will begin to play a more significant role in HNWI investment thinking. The purchase of land for ecological improvement is a noticeable area of growth.

No halt

The report concludes that there is no sign of the march of the super-wealthy coming to an end. “Without a catastrophic economic or geo-political event, there will be no halt to the large-scale wealth creation we have seen in recent decades. The positive impact of HNWIs on prime residential property is undeniable and our data indicates that these markets will continue to outperform.

“The rise of plutonomies and the class of HNWIs they have created means that an increasing number of investors and institutional funds will have no option but to ‘follow the money’. This mantra is too true to be ignored.”