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Where do India’s super rich put their money? Of course, they buy expensive cars, villas and opt for exotic holiday destinations. They’ve also proved that they’re good in deft handling of their investments.
There has been a phenomenal growth in the number of High Networth Individuals (HNIs) in India in the last few years. As per the findings of the Merrill Lynch Global Wealth Management report in 2010, India’s HNI population grew at 20.8 percent to 1,53,000 compared with 1,26,700 in 2009. HNIs' wealth in India grew by 22 per cent in the period 2009-10 accounting for US$ 582 bn wealth, as compared to US$ 477 bn in 2008-09.
According to the report, HNIs invested almost one-third of their savings in equities. However, the uncertainty prevailing globally in several asset classes, leading to frequent volatility, has impacted the investment sentiment of the HNIs. Now, the focus is more on capital protection products than on equity.
The world has still not recuperated from the period of uncertainty. While there have been bouts of recovery, like in second half of 2009 and similar period in 2010, the last four years have been more or less full of economic uncertainties.
The dream bull run of 2005-2007 saw HNIs flocking to the equity markets to make quick money. Many were successful but lot of people saw their wealth wiped out in matter of few weeks after the crash in 2008. Those who again mustered courage and started investing in 2010, burnt their fingers as the market kept sliding down since January 2011. All this made HNIs risk averse. “HNIs are asking much harder questions now. Fixed income is the new 'hot' idea as HNIs find it relatively safer. The focus is more on preserving capital and not so much on returns,” said Swapnil Pawar, chief invesment officer at Karvy Private Wealth.
According to wealth managers, risk aversion makes huge impact on the choice an investor makes over an asset class. Majority of the wealth of HNIs is distributed in three categories – equities, fixed income and real estate. There has been a major change in attitude towards these products in the last 18-24 months.
The pre-crisis period saw HNIs flocking to the equity markets as making money had become a child's play in the high growth era when almost every stock was rising day by day. The party which stretched for 3-4 years abruptly ended in January 2008 when market started tanking day by day. The initial reaction was of disbelief and when investors were back to their senses, capital protection was on top of their mind.
While equity is known to give best returns compared to other asset classes over a longer period of time, this time it’s testing investors' patience. In the last 2 years, the benchmark BSE Sensex has given negative return of (-)4.7 per cent while over the last one year, the negative return has been (-)11.1 per cent. In fact since January 2008 till now, the markets have given a negative return of over (-)22.3 per cent. “People have lost money which they never recovered. They have become significantly risk averse,” said Rajmohan Krishnan of Kotak Wealth.
“Earlier many HNIs invested in the equity markets in US and Europe. But things have changed now. After the financial crisis and fall of Lehman Brothers, they are wary of even big established brands in the developed world. The preference is to look at Indian companies,” said Anish Behl, Head-Strategy and Wealth Management, IndusInd Bank.
Mutual funds, which are an indirect route to invest into equities and diversify across sectors, has also seen a sea change in the way HNIs invest in them. “People now prefer equity funds which have a proven track record. They insist to invest in the schemes by established fund houses,” Pawar said.
While it may be a good opportunity to invest in the equity markets now, given the attractive valuations of many blue chip stocks, the HNIs are waiting for the tide to turn favourable before risking their money, experts believe. With the debt having given better returns than equities over the last 3-4 years, many HNIs are opting for fixed income products giving a passe to equity instruments.
There has been a marked shift towards fixed income products with a large number of people investing in variety of options available within the debt segment. Having burnt their fingers in 2008, HNIs now look for safety of capital and not so much returns.
“Compared to negative returns in equity markets, when bonds are giving 8.2 per cent annualised post-tax return why will people not flock towards debt products,” said Krishnan. While earlier debt as a category was utilised more by the institutions to park money for shorter durations, last 2-3 years has seen it generating lot of interest from the retail investors.
“Most of the HNI money is being deployed in real-estate and debt. They are exploring options such as fixed maturity plan, structured products, private placement bonds etc,” said Uttam Agarwal of Bajaj Capital.
Indians are known to love investments into gold and real estate. Earlier real estate was one of the top choices of HNIs which ate maximum part of their savings leaving the rest for equity and debt. However, now investors have become quite cautious in their approach towards real estate. “HNIs now prefer better brands,. While earlier they looked at making money on 'pre-launch' offers, they now want to invest only in the projects that have already taken off. The craze for pre-launch offers is coming down drastically,” Agarwal said.
“Clients are a little fearful of investing into real-estate. Many ask whether there is a bubble in the sector,” Behl said. Despite concerns of slowdown, most of the investors have made money by investing in realty in the last few years. “Lot of HNIs invest in residential projects. Most have managed to get handsome returns,” Krishnan said.
Experts believe that the biggest benefit of the 2008 meltdown is the increased awareness about the various investment options. “HNIs have become a lot discerning now. Now simple products are more in demand,” Behl said. This is in a complete contrast with the earlier attraction towards the “exotic products” that HNIs preferred earlier. Markets were flush with such exotic products in the pre-crisis period with an attempt to tap maximum number of HNIs.
Some of the exotic schemes were companies that invested in vineyards, or water treatment plants or even in distressed assets globally. Each of these categories promised high returns but were fraught with risk. “Many HNIs wanted to invest in such schemes because of the show-off value. They felt proud in telling people that they understand a particular segment well and can make money from off-beat ideas,” Behl said.
HNIs have come out wiser from the earlier crisis and now focus on preserving their capital rather than looking to earn quick money through exotic investment ideas. This is in line with the approach of most of the fund managers who are looking at safer options till the clarity emerges on the economic front and equity again becomes a preferred choice.
India is reeling under the continued onslaught of inflation, petrol price hikes and generalized insecurity about where the economy is headed. Against all expectations, property prices in our metros have held firm and even show signs of upward movement. While the man on the street continues to wonder when he will be able to buy a modest home of his own, India’s super-rich are raising palatial homes at truly astronomical expense.
Antilia, Mukesh Ambani’s 27-floor fortress at Altamount Road in South Mumbai, is already being talked of as the most expensive home in the world. Vijay Mallya has levelled his 4.5 acre ancestral home on Vittal Mallya Road in Bangalore to make way for the 82-apartment ‘White House’, in which he will be occupying an acre-sized ‘palace penthouse’ on the 33rd and 34th floors.
WHAT LIES BENEATH
On the surface, India’s super-rich appear to operate in an entirely separate dimension which has no overlap at all with the ‘real’ world. There is certainly an element of truth in this – wealth tends to beget more wealth, and at some point a perpetual motion machine grinds into motion – a cycle of money generation which vibrates on a rather unique frequency. The question is – does this frequency broadcast an ever-widening social divide? Not quite.
There are more elements to these super-homes than meets the eye. The trend of India’s extremely high networth individuals building palatial homes needs to be viewed from various angles. Of course, it is to a great extent a lifestyle statement that broadcasts the fact that the individual and his family have ‘arrived’ and should be numbered among the country’s wealthiest and most influential people. This statement alone brings inalienable social benefits with it.
Fundamentally, these palaces serve the same purpose that the homes of other affluent people do. At the same time, they also encompass a number of practical functions – they serve not only as residences but also as business centres and entertainment complexes. In other words, these residences have strategic importance to their owners and are not mere indulgences.
They also generate considerable employment and commerce in and around the localities they occupy. For instance, Ambani’s Antilia will provide jobs to no less than 600 people from all levels of the services industry. Many of the supplies that go into building such houses and keeping them operational must necessarily come from the local markets. Coupled with the employment-generation factor, they should be seen as economic dynamos in their own right.
HOW THEY AFFECT PROPERTY PRICES
Beyond doubt, the homes of the super-rich create a certain upward pressure on the price tags of luxury and premium homes in the immediate vicinity. However, it is also true that the real estate market in general is not affected, as these luxury developments represent a minuscule segment of the wider fabric.
It must be remembered that the Indian residential property sector operates on three distinct levels. The first is affordable or budget housing, for which the demand is constant and highest. Such housing does not occur anywhere near the prime areas where HNIs tend to build their homes, and remains entirely unaffected by these developments.
The next is mid-income housing, which is most sensitive to price movements. Though certain mid-income housing projects do happen near the prime areas of our cities, buyers in this segment have very little tolerance for unnatural spiking of property prices. Builders of such projects have to keep the larger market in mind and can ill afford to price themselves out of the market. This segment is therefore also not significantly affected, either.
This leaves premium and luxury housing, which does happen in the neighbourhoods in which India’s mega-rich build their homes. This rarefied segment caters to a class of buyers that tends to be, at least to a large extent, insulated from the usual financial concerns of home loan interest rates and percentile increases in property rates.
In the super-luxury housing segment, home buying is also a lifestyle-related undertaking. Increased property rates can and are often borne as long as there is a commensurate increase in the capital value and aspirational quotient of the property. Ironically, for this segment, a higher ticket size is sometimes valued more as it attaches an esteem value to the property and limits its accessibility to the masses.
Many tend to look at these super-luxury residential properties as irrational extravagances. However, the ground reality is that the homes of India’s super-rich play their own role in boosting commerce, even as the larger industry remains democratized and oriented to the needs of the masses.
Erstwhile maharajas cash in on land bank & palaces through real estate projects
NEW DELHI: Umaid Bhawan Palace atop Chittar Hill in Jodhpur is the largest private residence in the world, being home to the family of the erstwhile maharaja of Jodhpur. But the grand palace will soon have humbler neighbours, with a clutch of villas popping up on one side of the hill and apartments on the other, both being built by the current maharaja, Gaj Singh.
Sixty-five years after Independence, maharajas are making money from what they loved most - huge tracts of land and grand palaces. While running hotels or leasing out palaces to hotel operators started a decade or two ago, monetising land has picked up pace in the past three years after it dawned upon their owners that a new set of rich Indians are wanting to buy homes in these small, booming towns.
If in Jodhpur, Maharaja Gaj Singh is building a premium residential project in the precincts of his Umaid Bhawan Palace, in another Rajasthan city, Udaipur, Maharaja Arvind Singh Mewar is giving shape to a residential project that will come up alongside a large convention centre and a new 100-room hotel, next to a 30-room heritage hotel Shikarbadi that until recently was his family's hunting lodge. In Baroda, where the Gaekwads ruled for ages and built beautiful palaces and gardens, a residential project is coming up in the palace precincts.
Arvind Singh Mewar, who runs the HRH Group of hotels that includes the Lake Palace hotel in Udaipur, says the residential project will generate liquidity. He plans to deploy the money unlocked in other projects and businesses, for which he is planning to rope in a national developer.
Smaller Kingdoms Catching Up Too
"This was inevitable," says Sanjay Dutt, executive managing director, south Asia, at Cushman & Wakefield.
In the last 20 years, land prices in cities like Baroda, Jodhpur, Udaipur, Jaipur and Surat have gone up 5-10 times. "In the last five-six years, including the boom years, prices would have doubled, tempting even the royals into monetising their land through real estate projects," he says.
Even in erstwhile smaller kingdoms like Sachin, near Surat, and Bolangir in Orissa, many royal families have turned to property development. Many of them had leased out their palaces to large companies to run heritage hotels or were running the hotels themselves, but are now using their huge land bank and a real estate boom to fill their coffers.
"Everyone has to turn their liabilities into assets, especially with a huge boom in property prices over the last few years. It's a positive sign," says Aman Nath, co-chairman of Neemrana Hotels, who has bought heritage properties from many royals with the mandate to convert them into hotels.
FAT CATS GET FATTER: Households With `25 cr Net Worth Rises 30% to 81,000 in a Yr
Prosperous India is growing by leaps and bounds despite the worldwide economic slowdown.
The uber rich are getting richer at the top of the pyramid, many are clones of Richie Rich and the slowdown has not altered their lifestyle or spending patterns and habits one bit.
The net worth of ultra rich households in the country is expected to surge five- fold from ` 65 trillion ($ 1.2 trillion) in 2011- 12 to ` 318 trillion ($ 5.78 trillion) by 2016- 17, according to a joint report by CRISIL and Kotak Wealth.
Over 50 per cent of these ultra- highnet worth households ( HNHs) are in the four metros. The other top six cities account for around 13 per cent and the next 40 cities are home to about 15 per cent. The rest are spread across the remaining parts of the country, the report states.
An ultra HNH is defined as one having a minimum average net worth of ` 25 crore accumulated over the past 10 years.
Notwithstanding the hue and cry about the fall in industrial output and job losses, the number of Indian ultra HNHs is estimated to have grown by 19,000 to around 81,000 in 2011- 12 — a 30 per cent jump over the previous year. The HNHs now account for 0.03 per cent of the total households in India. The number is expected to triple to around 286,000 over the next five years, according to the report.
However, casting a dampener, V. K. Sharma, head of business, private broking and wealth management, HDFC Securities, said: “ I don’t think the upbeat mood and spending trend is across the board. There is a marked shift in sentiment due to the slowdown. A segment of HNIs ( high net worth individuals) are spending, but not all. Those who were splurging earlier are now merely spending. In the past 15 days, people have started investing in the market, expecting better returns.” These assumptions are based on an average GDP growth of 7.5 per cent annually, said Mukesh Agarwal, president, Crisil Research.
Kotak and Crisil have surveyed 150 ultra HNIs and procured official data from a host of agencies to write the second edition of the ‘ Top of the Pyramid’ report. It throws up some interesting trends in various behavioural aspects of the ultra HNIs.
The report found that there was 50 per cent increase in spending on apparel and accessories by the HNHs in 2011 over 2010, followed by a 23 per cent hike in vintage spirits and liquor.
It said allocation towards meeting expenses has risen to 28.2 per cent from 22.4 per cent last year.
The report also finds that individuals in such HNHs are allocating more income towards enlarging personal wealth rather than into their respective business as a result of economic slowdown.
In investment patterns, the report highlighted how allocations towards the highly volatile real estate sector dropped to 30 per cent in 2011 from 37 per cent in 2010.
“ One distinct facet of the HNI is his lifestyle; he goes to great lengths to maintain it. Our respondents did not seem to feel that the circumstances warranted any cutbacks in spending,” the report says.
“ In fact, many of them even justified the increase in expenditure by pointing out that the number of non- discretionary items was on the rise to support that lifestyle,” it adds.
The ultra HNIs maintained their lifestyle for social standing. Last year, destination weddings were the in- thing; this year throwing lavish parties for ad hoc events such as business success or launch parties have instead become a new area of spending.
In case of buying a car, the ultra HNIs are opting for exclusivity rather than going for established brands as they lacked exclusivity or are seen as mass luxury cars.
As the number of youth among the ultra HNIs is increasing, cars that project a youthful image are seen as exclusive and are being preferred. High- end luxury Japanese cars are preferred for regular use, while SUVs/ crossovers continue to be the most preferred cars among ultra HNIs, the report said.
Commenting on the report, Rajat Bhattacharya, co- founder Luxury Connect, said: “ The luxury segment is growing at a steady rate of 20- 22 per cent since the last couple of years.
There is a buoyancy in the market especially since 100 per cent FDI has been introduced in India. Many more luxury brands are planning to step into the market around this year- end signifying a huge demand for luxury items among the Indian buyers,” he said.
“ While, overall, this segment seems to be relatively unaffected by the slowdown in Indian economy, their patterns in spending, investing and savings present huge opportunities,” C. Jayaram, joint managing director, Kotak Mahindra Bank, said.
“ The fact that so many ultra HNIs said their spending habits have not changed due to the slowdown is an indication that they do not expect the slowdown to continue for long,” said Agarwal. “ However, it would be interesting to see whether the caution that has crept into their investments will spill over into their spending if the economic crisis persists longer than expected.” Professor Sri Ram Khanna of the Delhi School of Economics: “ The better offs continue to prosper in a slowodwn and are largely immune to it. The risk of growth depends on the income levels. The lower your income, the more you are at risk to fall. The rich and those affluent will otherwise continue to prosper.
Yet another key finding of the survey was that in stark contrast to their attitude towards spending, many of the ultra HNIs used their business acumen and understanding of markets and shifted focus to investing in safe havens such as debt and gold.
Allocations to investment in secured debt instruments increased to 29 per cent from 20 per cent in 2010.
Allocations towards equities remained unchanged at 34 per cent.
Nanik Rupani, chairman of Neutron Electronics Systems Ltd and former president of Indian Merchants’ Chamber, said: “ I don’t see people shying away from making investments. The only advice would be not to put all investments in one basket. I have been making investments in real estate.
People are also continuing to invest in gold, which I believe is a good bet, while the other option is fixed deposits.” The feeling among the HNIs was that the situation would come back to normal by mid to late 2013.
So, many of them are in a waitand- watch mode. But if the uncertainty on the global economic recovery lingers for some more time, however, there is a real risk that the patterns seen in investments will spill over into spending.
Source: Mail Today By Lalatendu Mishra 04 July 2012
An ultra HNH is defined as one having a minimum average net worth of ` 25 crore accumulated over the past 10 years.
Notwithstanding the hue and cry about the fall in industrial output and job losses, the number of Indian ultra HNHs is estimated to have grown by 19,000 to around 81,000 in 2011- 12 — a 30 per cent jump over the previous year.
Only 81,000 with net worth > 25 crore. Seems too low.
It must be more like 810,000.