The HNWI and UHNWI Are Banking On Real Estate

The average investor who followed the herd in 2021 and 2022 saw their net worth shrink as the value of their holdings in stocks and crypto cratered.

These investors felt on top of the world in 2021 when the stock market and crypto hit historic highs. Still, any sensible investor could see that this was all a mirage fueled by stimulus money funded by the government printing money. All this money printing would come back to haunt investors in 2022.

The result of trillions in government free money was recorded inflation rates not seen in four decades in June of 2022; inflation hit 9.1%, the highest since the 80s. To combat inflation, the Fed raised rates seven times in 2022, with more planned for 2023.

The increased cost of borrowing from rising inflation rates put a damper on consumer spending and corporate bottom lines, and according to the general definition of a recession exemplified by two consecutive quarters of negative gross domestic product (GDP), the U.S. entered a recession in the summer of 2022 after the second quarter.  

Add the war in Ukraine, high energy prices, supply constraints, midterms, and political conflict to inflation and recession fears, and you have a recipe for a market downturn. For 2022, the S&P 500 was down 19.44%. The Dow was down 8.789%, and for crypto, Bitcoin was down 65%, indicative of all cryptocurrencies.  

If you modeled your investing after the herd in 2021 and 2022, you undoubtedly saw your net worth shrink by the end of 2022. However, if you had modeled your investing after a group of High-Net-Worth-Investors (HNWIs) and Ultra-High-Net-Worth-Investors (UHNWIs), you would have seen your net worth increase.  

Real estate was the major way the wealthiest of the wealthy grew their net worth globally last year, 12 months marked by challenging economic conditions, according to a survey report from real estate consultancy Knight Frank.

For 46% of the survey respondents, real estate was the top investment opportunity. Lucking, Liz (2023, January 10) “Ultra Wealthy Saw Real Estate as an Investment Opportunity in 2022 Amid Volatile Financial Markets” Barrons.

Also, according to Knight Frank, four in 10 ultra-high-net-worth individuals with a net worth of more than US$30 million grew their wealth during 2022 “despite a year of permacrisis.”

The Knight Frank report is consistent with worldwide reports of HNWI and UHNWI sentiment toward real estate investments in 2023.

For example, according to the annual Luxury Outlook Survey 2023 by India Sotheby’s International Realty (ISIR), over 75% of High-Net-Worth Individuals (HNWIs) and Ultra High-Net-worth Individuals (UHNWIs) believe real estate will do well over the next two to three years.

A similar percentage (74%) consider real estate an important asset to hedge against inflation. Haidar, Faizan (2023, January 18), Over 75% HNIs expect real estate to do well even during inflation: Survey, Economic Times.

HNWIs and UHNWIs are banking on real estate to help them navigate the coming treacherous waters of the economy. Still, you’d be wrong if you think they’re just buying any type of real estate and sitting on it as it appreciates. They’re investing in cash-flowing real estate that generates benefits both now and in the future.

These savvy investors allocate heavily towards income-producing real estate to increase wealth and preserve capital in any economic condition, including inflationary times, because, unlike public options like stocks, bonds, etc., real estate can thrive from inflation. By leveraging inflation, smart investors can use real estate to their advantage – increasing their income as inflation rises from rising rents. This was evidenced by documented skyrocketing rental rates in 2022.  

In addition to serving as an inflation hedge, HNWIs and UHNWIs have long favored real estate for its long-term reliability not only as a source of cash flow but also as a source of appreciation, tax benefits, and a shield against market volatility.

But that’s not all. The true key to real estate investing is how these smart investors invest. Very few of them are doing it directly. Most rely on the expertise of others because most don’t have the time to do it on their own or the stomach to deal with tenants and property maintenance. Instead, they leverage the expertise of others by co-partnering with them through passive private company investments (i.e., private equity or real estate syndications).  

The beauty of passive investing is the ability to generate multiple income streams and re-invest this cash flow to expand existing income streams or add additional ones. The effect is to accelerate wealth creation exponentially.  

The key to wealth isn’t following the masses; it’s following the investors that ignore the masses. HNWIs and UHNWIs ignore the noise and rely on consistent and reliable assets that hedge against inflation and provide calm amid the turmoil.

That’s why HNWIs and UHNWIs have always banked on real estate, are banking on real estate, and plan on banking on real estate in 2023 and beyond to build wealth and preserve capital.