Indians now prefer to invest in financial assets

Real estate is losing sheen since the asset class has been giving poor returns in India for the past few years

A majority of wealthy Indians are likely to increase their asset allocation in financial investments, including stocks, mutual funds and alternative investments. However, there will be a decrease in percentage of people deploying money in traditional assets like real estate. According to the tenth edition of Knight Frank’s Wealth Report, released on Wednesday, only 41% and 22% of wealthy Indians plan to invest in commercial and residential property, respectively, in the next 10 years, compared to 47% and 31% wealthy Indians who invested in commercial and residential property, respectively, in the last 10 years.

The interest among India’s rich in residential property in the past decade is much lower than the global average of 54% and Asian average of 52%. The same holds true for the next 10 years as well. But in terms of commercial property, the trend in India matches the direction of the global average.

Others also acknowledge the trend of wealthy Indians moving from physical assets to financial products. For instance, according to the India Wealth Report, released on 23 December 2015 by Karvy Private Wealth, “Alternate assets and mutual funds categories are expected to grow the most—44% and 29%, respectively—in the next five years.”

The shift can be pegged to a large extent to the subdued growth in real estate sector for the past few years. As a consequence, Indian investors are finding other asset classes more attractive. However, it is also to be noted here that the average number of residential properties owned by wealthy Indians is 4, which is higher than the global average of 3.7 and 3.9 in other Asian countries.

The wealth survey further stated that 72% wealthy Indians buy properties as an investment to sell in the future, followed by 53% for diversification of portfolio and 38% for additional rental income.

However, with increase in the number of ultra high networth individuals (UHNIs), “need-based demand for luxury property in India will increase,” said Amit Goyal, founder and chief executive officer, global real estate adviser, North India, Sotheby’s International Realty.

“However, for investment, mid-segment properties will give better returns, compared to luxury properties. But one should not expect historical returns of 16-18% in the next decade. One may expect 12% internal rate of return,” Goyal added.

As far as investment destinations are concerned, wealthy Indians’ first preference is India for both residential and commercial property investments. Moreover, according to the report, Bengaluru is among the top 20 cities globally for investment according to its Prime Investment Residential Index (PIRI); Delhi and Mumbai rank 44 and 51, respectively, in the list.

Apart from investments in real estate and financial assets, changes in other avenues have also been seen. According to the survey, buying fine art and antiques have replaced watches; while jewellery continues to be the most preferred collectible investment followed by cars and bikes.

More Indian UHNIs are contributing towards philanthropy. In the past 10 years, while 78% of Indian wealthy made such contributions, in the next decade, 94% are expected to do so. In both cases, the Indian average is more than the global and Asian average in the report.

Prateek Pant, executive director-products and services, RBS Private Banking, said, “There is substantial increase in philanthropy activities among UHNIs. They are now more serious about planning such strategy-based activities.”

Other trends

It is expected that India will account for 5% of the total UHNI population and 6% of the billionaire population across the world by 2025. India ranks third in absolute increase in UHNI populations over the next 10 years; after the US and China.

In this survey, those with net assets worth $30 million or more are considered UHNI. It also stated that there are 6,020 such Indians, while the number of multi-millionaires (net assets of $10 million or more) is 14,800. This net worth excludes primary residence.

At present, two Indian cities are among the 97 global cities with highest number of UHNIs. Out of the 97, Mumbai and Delhi currently are ranked at 21 and 33, respectively; slated to move up to ranks 14 and 29 by 2025. Currently, with 1,094 UHNIs, Mumbai leads in India followed by Delhi with 545. The next decade will see the number in Mumbai increase to 2,243 and in Delhi to 1,128 UHNIs.

Even though the number of UHNIs in India has increased, their top concerns over the past decade and the next 10 years have remained the same. The biggest concern regarding creation and prevention of wealth in India is succession and inheritance. This is followed by tax and global economy.