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Annual

Wealth  

Report

07

Prime Residential Property

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Notes:

HNWI

Knight Frank and Citi Private Bank define High Net Worth Individuals
(HNWIs) as being individuals who hold more than US$10 million
(£5 million) in investable assets. Investable assets exclude primary
residences. Due to the nature of the subject matter contained in this
report we have included primary residences in the calculation of HNWI
asset allocation. 

Prime property

Prime property equates to the most desirable, and normally most
expensive, property in a defined location. Commonly, but not exclusively,
prime property markets will be areas where demand has a significant
international bias.

Research overview

Knight Frank Residential Research carried out face to face or telephone
surveys of HNWIs during January and February 2007. Our selection of
HNWIs concentrated on UK residents.

We introduce the Knight Frank Prime International Index in this report.
The index comprises a basket of real properties that are valued
throughout the year to provide the most accurate and timely guide to
prices and price movements in prime global markets. 

For more information on the methodology employed in this research
document please contact: Liam Bailey, Head of Knight Frank Residential
Research, liam.bailey@knightfrank.com or +44 (0)20 7173 4966.

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In Association with 

Knight Frank LLP

Citi Private Bank

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www.knightfrank.com

www.citibank.com/privatebank

While every effort and care has been made to ensure the accuracy of the information

contained in this report, the publisher cannot accept responsibility for any errors it may contain.

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07 

Introduction

08 

Key findings: confidence

and prosperity

11 

The rise and rise of wealth

13 

It has never been more 

expensive to be wealthy

15 

Attitude survey:

primary residences

17 

Attitude survey:

second homes

18 

Attitude survey:

investment properties

21 

Attitude survey:

portfolio summary

23 

Prime property outperforms

25 

Prime cities

26 

Prime country property

28 

Tax havens and 

domicile status

29 

Prime market outlook

30 

Trends to watch

Annual Wealth Report 2007

03

Contents

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Prime property. 

Prime profits.

knightfrank.co.uk

Yet all too often, a little knowledge is a dangerous thing. With constant market

and media speculation, you’d be forgiven for thinking that every property you

bought would deliver outstanding returns.

Rarely are constant, significant returns that easy.

Knight Frank’s Prime Property Consultancy Service maximises property assets.

With the expertise, the experience and the contacts across European and 

international markets, we can help you to build a property portfolio that works

hard for you.

So you can watch your assets grow.

For further information please contact: 

Andrew Hay on +44 (0) 20 7861 1077 or email

andrew.hay@knightfrank.com

Market coverage:

UK

Europe

Caribbean

Asia 

Australia

Africa

Services:

Asset Enhancement

Market Research

Valuation

Acquisition and Sales

Insurance

Mortgage Finance

Lettings

Planning

Taxation Planning

Property Management

Building Consultancy

Property can mean profit, it’s true.

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As part of the largest ski area in the world,
Courchevel, in the Savoie region of the French Alps,
has seen interest in its property market expand
hugely. Top properties now easily exceed 

20,000 per sq m.

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There has been an unparalleled growth of significant personal

wealth in recent years. This development is a crucial trend,

influencing consumption and saving patterns across the globe. 

The most noticeable result has been the concentration of wealth

and the growing influence of high net worth individuals (HNWIs),

defined as people with net assets in excess of US$10 million.

This phenomenon has been felt across the entire economy with

the private equity boom being a high profile symptom. Away

from financial investments, one of the key components of the

HNWI portfolio is residential property and in particular prime

market property.

To date the relationship between HNWIs and prime property has

been overlooked, an omission that is remedied by the publication

of The Annual Wealth Report: Prime Residential Property. This

report marks the collaboration between Knight Frank, property

consultants, and Citi Private Bank, a market leader in high value

European residential lending, bringing together our respective

expertise in the property and financial sectors. 

In this report we study the increasing importance of residential

property as an asset class and consider the role of second

homes, investment properties and development potential. For

the first time we examine the attitude of the wealthy towards risk

and opportunity arising from their residential portfolios.

There are three themes underpinning our analysis: 

The HNWIs are market leaders, making decisions to stay ahead

of the competition. Their activities influence behaviour far beyond

the prime markets, making the study of their motivations and

attitudes of critical importance to understanding future trends in

the residential property sector. Our understanding of this market

helps us advise HNWIs in maximising their portfolio returns. 

Patrick Ramsay

Head of Residential
Knight Frank 

Peter Charrington

Managing Director, UK
Citi Private Bank

Introduction

what do the wealthy expect from residential property;

how has rising wealth influenced prime residential performance

in the UK, Europe and globally over recent years; and 

where trends are pointing to over the medium term.

Annual Wealth Report 2007

07

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08

Liam Bailey, Head of Residential Research at Knight Frank,
presents the findings of The Wealth Report. 

The growth of wealth in recent years is a real and substantial

trend. Residential property markets have been the astute

witness to this wealth creation. The dramatic increase in central

London prices against the background of a more sober market

has demonstrated the influence of high net worth individuals

(HNWIs) upon property. 

This report by Citi Private Bank and Knight Frank investigates

the behaviour and attitudes of HNWIs to the residential property

market. It reports on their current views in a way that will

significantly inform how we advise on their residential portfolios.

To undertake this research, we first interviewed HNWIs based in

the United Kingdom (UK) and asked them questions about their

existing residential portfolios, motivations for purchasing and

disposing of property and their views on the risks and

opportunities associated with the property sector. The second

part of our research involved the completion of our Prime

International Residential Index. The index comprises a basket of

properties located in more than 70 prime market locations

worldwide. The properties are valued over time to provide an

accurate guide to average prices and price movements. 

When we first undertook this investigation, we expected to find

that HNWI property portfolios would be more varied and more

geographically diverse than other investment portfolios.

We were right, but this result is not just a function of wealth. 

HNWIs are positive about property. They view their residential

portfolio as an opportunity for lifestyle enjoyment, individuality

and exclusivity. They are more aggressive in their investment

strategies and are likely to have exposure to a range of what

might be termed alternative investments such as hedge funds or

private equity projects. They have a very confident attitude

towards property in terms of locations and investment

opportunities. One of the key differences between HNWIs and

other investors is this attitude toward risk and reward. 

The results of our report clearly indicate that HNWIs have

a higher than average weighting in residential property, with the

vast 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. This wider global reach is reflected in property assets

and the lifestyle drawn from more diversified portfolios.

There is no such thing as a typical HNWI portfolio. As investors

they are incredibly diverse and this is reflected in the make-up

and objectives of their portfolios. Some have a highly geared

investment model aimed at highly leveraged returns. Others are

content with prime and second homes. The one constant is that

in almost all cases the residential element of their net worth has

become more significant over time and is set to grow in the

future.

We introduce the plutonomy economic model in this report to

explain some of the key drivers behind this growth of wealth and

to help examine the implications on the residential market.

Key findings: confidence 

and prosperity

Annual Wealth Report 2007

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The model provides interesting insights including the recognition

that while property prices have grown steadily in most countries,

the prime markets have seen growth well above the mainstream

market rate. 

As the wealth of HNWIs rises, so does the cost of their desired

property, goods and services. It really has never been so

expensive to be wealthy. 

What motivates purchase activity in the prime market?

Our experience is that HNWIs have several drivers underpinning

their activities. The purchase of either a prime residence or

a second home has to satisfy: 

Time poverty:

The one thing that cannot be bought is time.

Convenience and accessibility are key motivators not simply

for the convenience of the commute to work, but also access

to leisure pursuits.

Luxury:

There is a real, almost tangible sense of luxury that is

attached to very high 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.

Modern iconic buildings and architects appeal as do historic

buildings. Such properties make statements about their

owners and how they wish to be perceived. Privacy can be

a mark of both luxury and prestige; together with time it is one

of the most significant issues for HNWIs.

All of the above become harder to maintain as wealth grows.

HNWIs try to keep ahead of the market either by bidding up

prices to remain exclusive (London) or exploring new areas (Brazil). 

This pushing at the edge of the market makes HNWIs so crucial

to understand. Where they go in terms of location and property

types, the rest of the market will follow. 

Where to next?

Over the next five years, we believe the trend of growing wealth

and greater wealth concentration will continue. London will be

a key location for future investment and will be a conduit through

which this wealth will be invested. The prime markets will

continue to outperform here in the UK, Europe and

internationally. 

There will be a significant demand and supply imbalance in the

best prime market locations. Price growth this year will be lower

than in 2006, although we predict prime markets will outperform

mainstream markets by quite a margin.

Annual Wealth Report 2007

09

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Figure 01 

The plutonomies: the income share of the top 1% has risen 

dramatically since the late 1970s in the US, UK and Canada

 

United States (US)

United Kingdom (UK)

Canada

1960

Year

1962 1964 1966 1968

1972

1970

1974 1976 1978 1980 1982 1984

1988

1986

1990 1992

1996

1994

2000

1998

2002 2004

05%

07%

09%

11%

13%

15%

17%

Source: Citi Investment Research

Source: Citi Investment Research

1960

Year

1962 1964 1966 1968

1972

1970

1974 1976 1978 1980 1982 1984

1988

1986

1990 1992

1996

1994

2000

1998

2002 2004

05%

07%

09%

11%

13%

15%

17%

Figure 02 

Of egalitarian bent: the income share of the top 1% is not rising 

significantly if at all in France, the Netherlands, Switzerland and Japan

Switzerland

France

Japan

Netherlands

10

Annual Wealth Report 2007

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Plutonomy central 

Take a short walk around central London, past street after street

of £5 million and £10 million houses, and there will be little doubt

that the wealthy have become very wealthy in recent years. The

rise of serious wealth has been characterised, in London at

least, by the property buying habits of the City banker and the

Russian billionaire. 

The property page headlines are not exaggerated. Wealth has

been growing and its growth has been fastest for the super-

wealthy. London is a good starting point for our investigation as

it is the de facto capital of the new plutonomy. 

Citi Investment Research first used the term plutonomy to define

the emergence of a more stratified society in the late twentieth

century in the US, UK and Canada. They noted that while the

majority of the population had become more affluent, the top

proportion of households (by income) had witnessed a more

substantial and rapid increase in wealth. 

Plutonomies are countries where the wealthy have

a disproportionate slice of economic wealth. This is not a unique

historic phenomenon. In some ways the drift towards a much

more egalitarian wealth structure in the twentieth century could

be seen as an aberration. It certainly is not the pattern of

previous centuries. 

Such concentrations of wealth in plutonomies have a huge

impact on savings and consumption patterns. In these

economies, growth is powered and consumed by the very

wealthy. Its opposite model, the egalitarian economy, has simply

not seen such wealth concentration. Japan and most of

continental Europe are examples of such egalitarian economies. 

To illustrate this trend, the top 1% of households (by wealth) in

the UK have increased their share of national income

dramatically in recent years, from a low of 6% of national income

in 1978 to 13% in recent years. This is not far short of the 15%

seen in the US (Figure 01). This experience is totally unlike

continental Europe, where the share of wealth held by the top

1% of households has declined or at best stabilised in recent

years (Figure 02).

What drives an economy to become a plutonomy?

Plutonomies rely on the presence of several factors to invigorate

wealth. These include creative financial innovation, technologically

driven productivity gains, capitalist friendly government, light

touch regulation and an open attitude to sourcing international

talent via immigration.

The UK and the US have been very successful in two critical

areas for plutonomy development. New media technologies

have had a significant impact on wealth creation (internet

downloading, cable and satellite TV). These outlets have

massively increased market size and media audiences. The

result has been the creation of new types of high wealth

occupations in sports, music, television, film, fashion and design. 

The second area is the rise of occupations such as the legal and

financial intermediaries, seen crowding into central London, who

help realise the potential for the globalisation of production and

consumption. All contribute to the development of the

plutonomy model. 

The future…

We predict that such wealth inequality will only increase. The UK

will see a continued development in this direction. Wealth from

the US, Europe, Russia, Middle East and Asia circles the world

and a large proportion is invested either through, or in London.

The ranks of the wealthy in the plutonomy are growing. It is in

cities and locations characterised by global outlook and activity

where we will see this trend most. 

Where are the next plutonomies? 

Eastern Europe appears to be embracing many of the

characteristics of a plutonomy. Russia is the classic emerging

plutonomy, and China and India are following closely. 

Over the last two decades where the plutonomy model has

been developing, the wider population has seen the benefits of

economic growth. The wealth pie has become larger for just

about everyone. This growth will continue and we will see

ongoing serious wealth concentrations in the plutonomies. Only

significant political change will affect this trend.

The rise and rise 

of wealth

Annual Wealth Report 2007

11

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Figure 03

 

The expense of wealth: general inflation (US CPI) against 

luxury goods inflation (The Forbes Cost of Living Extremely Well Index)

Forbes Cost of Living Extremely Well Index

Year

Index 1976 

=

 100

Index 1983 

=

 100

1976

1978

1980

1982

1984

1988

1986

1990

1992

1996

1994

2000

1998

2002

2004

2006

100

200

300

400

500

600

700

800

Consumer Price Index

Source: Citi Investment Research, Forbes, Datastream 

1983

Year

1984 1985 1986 1987

1989

1988

1990 1991 1992 1993 1994 1995

1997

1996

1998 1999

2001

2000

2003

2002

2004 2005 2006

100

200

300

400

500

600

700

800

Source: Knight Frank Residential Research, HBOS

Figure 04 

Unattainable luxury: average UK house price growth 

(HBOS all property) against prime central London house price growth (Knight Frank)

Prime central London house prices

All UK house prices

12

Annual Wealth Report 2007

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It has become harder to keep up

There has been a growth in the number of wealthy people and

their level of wealth has become ever larger. Unsurprisingly,

HNWIs are confident about their ability to generate future

income. They spend a larger proportion of their incomes than

average and they have very low, if not negative, savings ratios.

These two factors mean that not only is there more potential

wealth to spend but that the desire to spend is being acted upon.

This phenomenon has already been played out in the markets.

Figure 03 compares general goods and service inflation, in this

case US Consumer Price Index (CPI), with luxury inflation based

on The Forbes Cost of Living Extremely Well Index. In the three

decades to 2006, general prices rose by a little over 250%. Over

the same period, luxury prices rose by 630%. On average,

luxury prices have been rising every year by an additional 2.6%

compared to general prices. 

The same trend is found in property. Comparing the mainstream

UK market with the prime central London residential market

(Figure 04), we see that prices of prime property have risen by

680% compared to 490% for mainstream UK property over the

past 23 years. In London, the demand imbalance and its impact

on prices has intensified in recent years.

Property, the ultimate Giffen good

As the plutonomy model develops, luxury products and services

continue to rise in value. These are Giffen goods: goods that

become more desirable the more expensive they are. 

One key beneficiary of this trend has been prime residential

property. For many, property is the ultimate Giffen good. 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. 

While the supply of properties has increased slightly over time

and new prime markets have emerged, demand growth is vastly

outpacing the expansion of supply. Prime property is unlikely to

lose its status as the ultimate Giffen good. 

It has never been more 

expensive to be wealthy

Annual Wealth Report 2007

13

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Unique property related factors

Development or improvement

Long term investment

Short term investment

Tax status

Access to work

Family or historic associations

Lifestyle opportunity

93%

59%

72%

57%

39%

52%

62%

75%

Figure 05

 

Influences on primary residence location: how important were the 

following in influencing the choice of location for your current primary residence?

Source: Knight Frank Residential Research 

Climate risk

Congestion

Ease of access

Tax

Crime

47%

58%

57%

54%

57%

Figure 06

 

Risk factors: with regard to your primary residence location, do you 

think the following will become more or less important over the coming five years?

Source: Knight Frank Residential Research 

Social and economic environment

Crime and security

Taxation

69%

70%

46%

Figure 07

 

Future outlook: do you feel confident about 

the outlook for your primary residence location?

Source: Knight Frank Residential Research 

Least important

Neutral

Most important

Less important

Neutral

More important

Not at all confident

Neutral

Very confident

14

Annual Wealth Report 2007

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The 2007 attitude survey 

Between January and February 2007, Knight Frank Residential

Research undertook detailed interviews with a sample of HNWIs

based in the UK. The results have been analysed to reveal the

current ownership of prime residential property as well as future

investment and ownership intentions. Our survey highlighted

areas of risk and opportunity identified in relation to HWNI

property portfolios. 

What are the key factors influencing prime residence
location? 

Of all the property choices facing HNWIs, the location of their

prime residence is perhaps least flexible. The most prevalent

factors influencing the selection of prime residence locations are

the criteria of individuality and uniqueness. One survey

participant spoke of their search for a houseboat; while another,

of their desire for a period property in an unspoilt historic

location. The next most important factor influencing property

selection is lifestyle. This is a requirement that applies to city

centres and rural locations. 

Together with long term investment potential through capital

gains, these factors are higher priorities than practical

considerations such as access to work for HNWIs.

Our survey was limited to UK residents. For domiciled HNWIs,

UK tax status is unsurprisingly low on their list of current location

decision-making issues. For resident but non-domiciled

individuals included in our survey, their tax status in the UK was

of very high significance. For both HNWI groups, the impact of

tax is probably the single most important feature concerning the

future outlook for the location of primary residence.

Which issues affecting prime residences will become more
significant in the future? 

Taxation is an issue that will become increasingly significant over

future years. There is a note of unease about the increasing

complexity of UK tax affairs and the upswing in tough talk from

the UK government regarding offshore tax arrangements.

Talks of changes to taxation are being closely watched.  

Despite the level of interest in the media and elsewhere

regarding climate change, this issue did not rate highly for

HNWIs in terms of choices regarding principal residence

locations. Their view is that the UK is likely to have a relatively

benign outlook; there is some limited concern about future flood

risk in London, but this was not significant enough to be

a defining issue. Later in this report we look at other areas of

activity which suggest that green issues will begin to feature

much more significantly.  

Most are generally relaxed about the outlook for the UK as

a primary residence location. The most significant concerns for

the medium term are growing congestion and increasing

difficulty in accessing property. This is especially marked among

London and south-east England residents. 

How confident are HNWIs regarding their primary residence
location?

HNWI residents in the UK are confident about the future of their

home country. There is a noticeable belief in the future of

London as an economic centre. HNWIs assume that the current

shift in activity from New York to the UK will at worst stabilise but

more than likely increase. The flow of talent into the UK, London

in particular, is felt to be a hugely positive benefit for the future.

Interestingly, the most significant area to give confidence to

HWNIs is future security and crime issues. References were

made to the UK’s apparent vulnerability to terror attacks and

London’s position as a primary target. There was a general

feeling that this was such a difficult area to second guess that it

was effectively discounted.

As we commented earlier, taxation is the single issue where

confidence is far lower. There is a concern that after a long

period of stability, we are moving to a position where any tax

changes could become significant. 

Attitude survey:

primary residence

Annual Wealth Report 2007

15

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Unique property related factors

Development or improvement

Long term investment

Short term investment

Tax status

Access to work

Family or historic associations

Lifestyle opportunity

93%

61%

61%

52%

49%

41%

84%

52%

Figure 08

 

Influences on second home location: how important were the 

following in influencing your choice of location for your second home locations?

Source: Knight Frank Residential Research 

Climate risk

Congestion

Ease of access

Tax

Crime

68%

74%

67%

61%

58%

Figure 09 

Risk factors: with regard to your second home locations, do you 

think the following will become more or less important over the coming five years?

Source: Knight Frank Residential Research 

Social and economic environment

Crime and security

Taxation

70%

76%

73%

Figure 10

 Future outlook: do you feel confident about 

the outlook for your second home locations?

Source: Knight Frank Residential Research 

Least important

Neutral

Most important

Less important

Neutral

More important

Not at all confident

Neutral

Very confident

16

Annual Wealth Report 2007

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What are the key factors influencing secondary residence
location? 

Unique property features dominates the list of influences on the

HNWI second home search. Finding a property with sufficient

hillside to permit the development of a semi-commercial olive

grove in Italy was one specification. The desire for a property to

pursue fishing and sporting interests was another. 

Unsurprisingly, desired lifestyle was the next most important

factor in selecting a secondary residence. Second homes offer

more scope for individuality and to differentiate portfolios. 

The potential for development or improvement was a significant

factor influencing the selection of second home location.

A second home is commonly chosen for its medium to long

term investment (more than 7 to 10 years). 

While access to work is low on HNWI requirements, it is an issue

that could become far more significant in the future, as more

work is undertaken away from business and prime residence

locations. 

The tax status of the second home location is not felt to be of

great significance. The ease of accessing and exiting the market

is regarded as being important to very important, in particular

taking profits from eventual sales of properties.

Of those surveyed, 60% have a second home in the UK. Half of

those surveyed have an international second home, with three-

quarters of these being located in Europe. European second

home locations were split equally between sunbelt locations

(primarily for winter sun, holiday and weekend use) and Alpine

ski properties. 

With regard to second home locations, which factors will
become more important over the next five years?

The potential impact of congestion was of most concern to

HNWIs, in particular the spread of travel and associated noise

and disturbance. We are now seeing an increasing push to

remote and new unexplored locations (mostly within Europe and

to some extent within the UK) for second homes. Congestion is

an issue for primary residences as well, but is largely accepted

due to the accepted trade-off between proximity to work and

convenience of location.

Climate risk was identified as the next most important factor.

Concerns were expressed about whether Mediterranean and

other sunbelt locations would become increasingly

uncomfortable in summer months. Likewise, Alpine resorts have

experienced recent problems with snow reliability and the

attractiveness of lower altitude resorts was raised. 

Ease of access and the realisation that newer, more remote

locations will require an increasing degree of complicated travel

was also noted.

Tax and crime were identified as issues likely to become more

significant over the next five years, but less than the previous

items. Taxation is mainly a concern for those considering the

future of the location of their primary residence. Crime is an

issue that can be avoided and protected against.

Confidence in second home locations

HNWIs have a sophisticated attitude to the risks associated with

overseas second home locations. There is reported trade-off

between lifestyle opportunities and risk. There is some concern

regarding the future of second home locations, especially the

time implications of long haul as opposed to short haul.

Taxation is again an area of increasing concern regarding

second home locations and the rules surrounding capital gains

and inheritance taxation issues.

Overall, there is confidence about the location of second homes,

especially those in Europe. 

Attitude survey:

second homes

Annual Wealth Report 2007

17

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Objectives and attitudes surrounding investment properties

More than half of HNWIs surveyed hold residential investment

properties in a personal capacity. The most important aim for

HNWI investment properties is the achievement of a strong

capital return. Target rates of capital growth are variously

ascribed to a range between 8% and 15% per annum. Rental

return is far less significant for most HNWI investors. The main

objective is that rents will allow investments to cover costs. 

Of more importance to the HNWI investor than rental return is

portfolio liquidity, the ability to access gains at a time of their

choosing. Ease of access to properties for inspection and

review is important. Development and improvement potential for

residential properties within investment portfolios is a key area

for more than three-quarters of HNWIs.

The overwhelming majority of properties owned for investment

purposes by UK resident HNWIs are located in the UK (more

than 90%). This location reflects a desire to invest in locations

Attitude survey:

investment properties

Liquidity

Tax status

Ease of access

Capital return

Rental return

70%

58%

70%

87%

64%

Figure 11

 

Investment objectives: in terms of your investment 

properties, how important are the following to you?

Source: Knight Frank Residential Research 

Least important

Neutral

Most important

personally known to the investor, where the market has been

fully researched. The level of reported investigation contrasts to

our experience with non-HNWI investors. 

In terms of markets and properties, there is a significant bias

towards established prime to super-prime markets, especially

central London and prime south-east locations.

Attitudes to investment risk varies considerably – there is no

typical HNWI in this respect. Approximately 30% to 40% could

be described as having aggressive investment strategies. Their

objective is to maintain very thin strips of equity and to achieve

highly leveraged returns from residential property, especially

prime property. 

At the other end of the scale, a solid 30% of HNWIs do not

currently hold and do not expect to buy investment properties in

the near future. Risk aversion is one reason. Another is the clear

belief that direct property ownership is a more active investment

and that the time demands of investment property are too great. 

18

Annual Wealth Report 2007

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Monaco is the world's wealthiest nation per person
and the most densely populated. Its cosmopolitan
residents, attracted by the principality's generous tax
regime, have helped push prime residential prices 13%
higher in one year, to stand at 

35,000 per sq m.

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As the country's leading financial and business
centre, Shanghai is the powerhouse of China's
economic growth. A potent combination of huge
demand and limited supply for prime residential
property continues to push values upwards.

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HNWI investment portfolio analysis 

Property accounts for 42% of HNWI asset allocation. If we drill

down into the property element of the portfolio, 23% of total

asset value is held in the primary residence, 7.6% in secondary

residence(s), 4.2% in residential investment properties, 2.6% in

direct commercial and other property and 4.6% in indirect

property investments. 

HNWIs believe in the potential returns offered by residential

property. They have the desire to increase their portfolio

weighting in this sector from 42% to 45% on average. The

increased weighting would take the form of additional

investment properties for about 50% of HNWIs, and additional

second homes for approximately 40% of HNWIs. 

The biggest area of potential growth in property assets is

indirect investments. The desire to gain exposure to commercial

and residential property markets in locations such as Russia,

Brazil, China and other key emerging markets is vast. For the

HNWI the time involved in understanding the taxation and legal

implications of direct ownership pushes them to consider the

indirect route. We would expect to see the indirect property

investment share of the HNWI portfolio grow from 4.6% to

above 5% in the next 12 months. 

In terms of their residential property portfolio, the ratio of debt to

equity including the primary residence was 68% equity to 32%

debt. There was an acceptance of higher debt to equity ratios

on investment properties and second properties as compared

to primary residences, which in 30% of cases were owned with

100% equity.

Property has always been a key part of the HNWI portfolio.

In Europe, Ireland and UK, there is an enthusiasm for property.

We would expect to see a very different portfolio if we looked at

HNWIs from other countries. 

Attitude survey:

portfolio summary

42%

58%

4.6%

2.6%

4.2%

7.6%

23%

32%

68%

Figure 12 

Overall portfolio weighting: 

HNWI portfolio weighting by asset 
class (including primary residence)

Source: Knight Frank Residential Research

 

Property

Other

Figure 13 

Property portfolio weighting: 

HNWI property portfolio weighting* 
(including primary residence) 

* Percentages are calculated as a proportion of the 
whole portfolio, therefore the total equates to 42%

Source: Knight Frank Residential Research

 

Residential main

Residential second

Investment

Commercial and other

Indirect

Figure 14 

Equity stake: debt to equity 

ratio on HWNI residential portfolio 
(including primary residence)

Source: Knight Frank Residential Research

 

Debt

Equity

Annual Wealth Report 2007

21

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2%

4%

6%

8%

10%

12%

14%

16%

14%

10.9%

5.3%

5.4%

Average of capital value growth

Q4 2005 to Q4 2006

Average of rental value growth

Q4 2005 to Q4 2006

Average of gross rental yield

Q4 2005

Average of gross rental yield

Q4 2006

Figure 15 

Prime market performance indicators: global prime residential 

market capital growth, rental growth and gross yield data (un-weighted) 

Source: Knight Frank Residential Research 

Top ten locations

Bottom ten locations

St Petersburg

Russia

Moscow

Russia

Delhi

India

Mumbai

India

Cape T

own

South Africa

London

United Kingdom

Guangzhou

China

Beijing

China

Shanghai

China

Oxfor

d

shir

e

United Kingdom

10%

0%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Milan

Italy

Puglia

Italy

Dor

dogne

France

Geneva

Switzerland

Bor

deaux

France

Kuala Lumpur

Malaysia

Mallor

ca

Spain

Cayman Islands

Caribbean

St T

ropez

France

Gascony

France

95.2%

75%

47.1%

43.8%

37.4%

28.6% 28.1% 27.1%

16%

15%

3.1%

3%

2.8% 2.7% 2.0% 1.6% 1.3%

0%

0%

-4.5%

Figure 16 

Prime market performance indicators: global prime residential 

market capital growth, rental growth and gross yield data (un-weighted)

Source: Knight Frank Residential Research 

22

Annual Wealth Report 2007

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Annual Wealth Report 2007

Overview

Readers familiar with the UK, US, Irish or Australian residential

markets will be surprised to hear that not all countries share

a fascination, or an obsession even in the case of the UK, with

property prices. Even in Europe with its mature property

markets, gathering residential market data is hard, but is even

more difficult for prime market data. 

By comparing similar properties across all localities, the Knight

Frank Prime International Residential Index provides a like-for-

like analysis of capital values, rents and investment yields. Our

analysis of the prime global housing market covers 70 locations

distributed across Europe, the Caribbean, the Americas, Africa

and Asia. 

Our definition of prime markets is divided into four key location

types, presented here with examples: 

Cities:

Paris, London, Moscow

Sunbelt locations:

Cote d’Azur, Forte dei Marmi

Winter sport locations:

Courchevel, Verbier

Low tax jurisdictions:

Monaco, Andorra, Jersey

The global context 

Reinforcing our theory that it is prime property that has

outperformed in recent years, prices for the most expensive

global property rose on average by more than 14%* in 2006

compared to a 9%** rise in the mainstream market. 

Prime market price growth was led by city locations in Russia,

China and India, where growth above 40% has not been

unusual. These areas have seen high growth on the back of

rapid economic development, together with the creation of new

wealthy sections of society. This is leading to intense

competition for the best apartments and villas in secure prime

neighbourhoods. 

The more mature markets tended to underperform average

market growth. New York was hit by the wider US market

slowdown, registering only limited growth during 2006 for prime

property. Many of the slowest country and rural markets were

also concentrated in established markets such as France and

Italy. Such underperformance points to increasing supply in

these markets. Value constraints have been hit after several

years of very strong growth. 

Despite a struggling US market, Caribbean property saw healthy

capital price growth with prices on some islands rising by

upwards of 20% in a year. The strength of the non-US markets

in the Americas was also seen in Brazil, with Sao Paulo

demonstrating a similar trend with capital prices in the best

residential location growing by up to 12% during the year. 

Prime property outperforms

* Knight Frank Prime International Residential Index 
** Knight Frank Global House Price Index

23

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The demand for prime residential property in
Moscow, Europe's most populous city, pushed
values up by an astonishing 75% in 2006.

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London and Monaco fight for the top spot

Which is the most expensive city in the world?  London, New

York, Hong Kong or Tokyo? All claim the title. The difficulty is in

the comparison. The Knight Frank Prime International Index

attempts to solve this problem by using a property benchmark

allowing for a fairer comparison location by location. 

The result is that London has the title of most expensive city –

by a whisker – just above Monaco at €35,000 per sq m. The list

is crowned by the international markets. These are locations

where international buyers make up a minimum of 20% of all

purchases and 40% of the most expensive purchases. This

domination by global locations reinforces our earlier contention

that it is footloose HNWIs who are controlling the fortunes of the

top of the market across the globe. 

You need to travel to the middle of the list before you find

markets that are not frequented by these globetrotting elites.

New contenders

In terms of price growth, the crucial players to watch are

St Petersburg and Moscow (Russia) and Delhi and Mumbai

(India). Together with Guangzhou and Beijing (China), we are in

the presence of the future key prime cities. 

We forecast that within 10 years, Moscow will vie with London

for the most expensive city in the world. While the prime area of

the city will be much smaller, the prices achievable for new build

prime developments will be comparable. There is huge demand

for prime property in Moscow owing to little existing stock and

a very small potential pipeline of additional prime property. 

Our future forecast also sees New York sliding from its number

three position to number four, below Hong Kong. This reflects

our belief that the Hong Kong market will recover from its

current cyclical trough and see an improvement in demand and

pricing after several years of underperformance. 

Prime cities

Euro per m sq

£ per ft sq

500

1,000

1,500

2,000

2,500

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

Figure 17

 Prime city values: price of prime property in urban locations  

Source: Knight Frank Residential Research 

London

Monaco

Hong Kong

New Y

ork

T

okyo

Cannes

St T

ropez

Sydney

Paris

Rome

Moscow

V

e

nice

St Petersburg

Flor

ence

Geneva

Madrid

Dublin

Milan

Birmingham

Edinburgh

Mumbai

Manchester

Cape T

o

wn

Brussels

Prague

Delhi

Beijing

Shanghai

Kuala Lumpur

Sao Paulo

Annual Wealth Report 2007

25

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Best country 

With Monaco controversially defined as a city, the field is now

open for St Jean Cap Ferrat (France) to be crowned the most

expensive country or town prime market (€30,300 per sq m).

While St Jean sits comfortably ahead of the field, some of the

locations listed might have the non-jet set scratching their heads

and asking - where? 

Sunbelt and winter sport locations vie for top of table, with

Courchevel (France) standing out in the Alps at €21,000 per sq m.

The top 14 are all international second home locations,

dominated by HNWIs who have the energy for skiing or

yachting, while recuperating away from the office. 

At 15 and 16 in the table we see the entry of the UK commuter

locations, in this case locations in Surrey and Oxfordshire. These

are the UK country equivalents of Belgravia and Knightsbridge. 

Growth and decline

Some commuter locations in the UK have made it into the top

of the prime market table. These locations have risen on the

back of domestic and international demand, albeit following

quite low growth in 2004 to 2005. There will be more growth in

prime country locations in the UK in 2007 and 2008 (probably

double digit growth) as more equity is taken out of the London

market.

Flat price growth and the odd price fall have been seen in some

markets, especially in France and Italy. These are areas where

demand has matured and where growth has slowed, just as

supply has been growing strongly. In both countries, we expect

to see a revival of price growth over the next year to 18 months

as demand growth begins to recover. 

Forecast 

We believe that the quest for exclusivity will see increasing

purchase activity in locations much further afield. Brazil is

a newly emerging location, which has seen a sharply higher

profile in Europe and North America in recent years. 

We would suggest that over the next two to three years several

areas in eastern Europe will join the accepted range of prime

European locations. Croatia will be one of the first markets to

offer prime country locations and prices in some areas are

already beginning to compete with France or Spain. 

Prime country property

Euro per m 

s

q

£ per ft 

s

q

500

1,000

1,500

2,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

Figure 18

 

Prime country value

s

: price of prime property in rural and 

s

maller to

w

n location

s

  

Source: Knight Frank Residential Research 

S

t Jean Cap Ferrat

France

Co

s

ta 

S

meralda

Italy

Cap dí

A

ntibe

s

France

Forte dei Marmi

Italy

Portofino

Italy

V

a

l d

I

s

er

e

France

V

a

lbonne

France

S

t Paul

s

 (Canne

s

)

France

Cortina

Italy

Mu

s

tique

Caribbean

Megeve

France

V

e

rbier

Switzerland

Barbado

s

Caribbean

S

urr

e

y

United Kingdom

O

x

for

d

s

hir

e

United Kingdom

Grimaud

France

Ber

ks

hir

e

United Kingdom

Jer

s

ey

Channel Islands

Mallor

ca

Spain

Bermuda

Caribbean

Chianti

Italy

Hamp

s

hir

e

United Kingdom

Cor

k

Ir

eland

La

k

e Como

Italy

Monter

chi

Italy

Pr

ovence

France

S

an Remo

Italy

Lau

s

anne

Switzerland

Cayman I

s

land

s

Caribbean

Cour

chevel

France

26

Annual Wealth Report 2007

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Italy's Lake Como continues to attract wealthy second
home owners, with prices now close to 

6,000 per sq m.

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Tax is critical

Our survey revealed the importance that HNWIs place on

taxation issues. The global nature of wealth creation and its

mobility means that tax status has a crucial influence on choice

of location for prime residence. 

Non-domicile residency in the UK has become much more

significant over recent years. The UK offers a very positive

environment for foreign HNWIs and this is a significant factor

that has underpinned the rise in residential prices at the top of

the London market.

The non-domicile residents in the UK have a hugely positive

view of the UK, especially central London and what we might

term the London halo, the southern England prime country

house market. London is seen as offering a good lifestyle,

a friendly tax regime, open society and a can-do attitude similar

to the US but different from the business environment perceived

to exist in continental Europe.   

Alternatives 

The influence of tax status impacts significantly on residential

market performance as in other markets, particularly the

Offshore Financial Centres (OFC) in Europe and the Caribbean. 

Monaco is perhaps the most famous example. Many of its

33,000 residents are attracted by the very appealing tax status

offered. Demand for residency and thus property has grown

extraordinarily in recent years. With wealth in the financial

sectors set to expand further, we expect prices to rise higher still. 

A smaller and more affordable alternative to Monaco, Andorra

has seen demand growth for Passive Residency Permits and

again for property. Demand has pushed prices higher at a rate

of 10% per annum for several years. While not explosive, this

growth is healthy.

The Channel Islands offer additional alternatives for HNWIs

looking to arrange their tax status. Demand is so strong that in

Jersey long term residency is carefully controlled. With few

exceptions, consent for residency is given to those who own

a property on the island. The purchase of property is subject to

consent, which is only given in a limited number of cases.

There are many other OFCs offering tax benefits to HNWIs. The

impact on the residential market is fairly consistent. A friendly

HWNI tax system means property prices will be higher than they

ordinarily would be. The really big change is that price inflation

in almost all OFCs has become more significant in recent years.

We believe it will continue at a much higher rate than that seen

in non-OFCs over the short and medium term. 

Tax havens and 

domicile status

28

Annual Wealth Report 2007

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Growth in wealth will underpin significant additional
demand for prime residential property

Barring a significant economic shock, the growth of serious

wealth will continue apace in the UK and in the global economy.

The plutonomy economic model in the UK will be reinforced

over the next few years. The growth of wealth will see increased

demand for prime residential property across the board in

primary and secondary homes and investments. 

Prime property will outperform

Prime property prices in the UK will rise noticeably faster than

the mainstream residential market in 2007. We expect to see

a 12% increase in prime central London compared with 6% for

the rest of the UK. The outlook for 2008 to 2010 is less certain,

due to the high price level we are now seeing. 

Prices in central London have risen by 38% in 18 months. If our

forecast for 2007 is correct, they will have risen by 55% in three

years. Prime country property in the UK will outperform the

mainstream market from 2007 to 2009, as the London boom

releases more equity for country bound homeowners. 

Prime property globally will significantly outperform mainstream

markets during 2007. Demand in prime markets will be

underpinned by a growth in the wealthy population, the trend to

more secondary homes and a greater willingness to treat

residential property as an integral part of an asset class basket. 

Price forecasts in the global market can be a foolhardy

occupation. We venture to say that the prime market will see

growth in 2007 at double the rate seen in the mainstream

market – 10% compared to 5% would be a realistic

guesstimate. Growth rates in China, India, Russia and notably

London will be half the rate seen in 2006. 

Could it all go wrong?

Yes is the answer. It is always easy to feel confident when the

market is strong. Property market commentators can fairly be

accused of having very short memories. Such amnesia is not

helped by the monthly release of sharply divergent market

movement trackers. It is sobering to remember that it was only

two years ago that the London market was still in the doldrums

and a market meltdown for the UK, Australia and the US was

being predicted.

The reversal in the fortunes of the mainstream and the prime

markets is directly related to the strength of the world economy

and the ongoing growth witnessed globally. 

What would it take to knock the prime global residential
market off track and see prices fall significantly? 

The most obvious risks are economic recession, geo-political

instability and terror attacks. The last two are so difficult, if not

impossible, to predict that we can set them to one side as

unknowns. 

Economic recession prompted by higher inflation and higher

interest rates, is probably the most significant and most likely

of all the risks to the prime markets. The higher interest rate

environment would place huge pressure on asset prices at

all levels.

Inflationary led interest rate rises would unravel the basis for

current asset values; the acceptability of current property yields

is linked to the cost of money. If this rises, the value of property

will fall. HNWIs are to some extent already insuring themselves

against this eventuality, as their portfolios include significant use

of hedging instruments. 

What makes us confident about the prime market?

We have discussed at length the positive combination of world

economic growth, the plutonomy model underpinning wealth

expansion and concentration, and the increasing acceptance of

residential property as an investment asset class. These are the

key reasons for our confidence. 

The availability of prime residential property is relatively fixed in

comparison to demand. Such properties are assets for

aspirational lifestyles. Their value is driven by an inequity in the

market between the number of properties available in the

locations where HNWIs want to buy.

Prime market outlook

Annual Wealth Report 2007

29

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Mass affluence will drive the HNWI to search harder for
exclusivity

The same trends seen in luxury retailing are mirrored in the

property market. Exclusive resorts and locations cease to be

exclusive when the mass affluent begin to buy into them. Such

mass affluence is viewed with concern, given the potential

impact of congestion and over-popularity of locations. This is

most evident in country locations (sunbelt and winter sport

locations) where the desire for exclusivity is strong. 

Views about prime city locations tend to be more egalitarian, at

least on the surface. HNWIs describe London, New York and

Paris as places to enjoy work and leisure. The social and work

mix of these cities is described as offering ‘invigorating’ and

‘creative’ opportunities. This said, there is still a noticeable

tendency to find locations that are unique, elite and different. 

The desire to escape mass affluence will grow as this sector

expands. The number of second homes in Europe has seen

double digit growth every year for nine years. We expect the

same rate of growth over the next decade. 

Exclusivity will drive the demand for locations only served by

private jet. Island locations will become ever more desirable.

Formerly off-pitch locations will find new appeal, especially

alternatives to the very popular sunbelt option. Northern Europe

will see more interest, especially Ireland and Scandinavia. 

Of UK households, 3% plan to buy a home abroad. There could

well be a quadrupling of overseas second home ownership

within the next 10 to 15 years. This is a huge increase. Add to

this the impact of new Russian and Eastern European buyers,

many of whom are only beginning to invest in these markets,

and the growth could be higher. Assuming there is no significant

backlash in the form of green taxes or regulations, this market is

set to expand massively. 

Green issues begin to feature

Green issues will begin to play a more significant role in HNWI

investment thinking. The desire to own and influence the

renovation of ecological assets is already driving this agenda,

especially for farmland and forestry investments. The concern

will be less about carbon footprint reduction than the potential

for offsetting activity. 

This area of activity is potentially huge. The purchase of land for

ecological improvement is a noticeable area of growth. The

interest in this area is much wider than restoring historic or

degraded environments in the UK or Europe, but also extends

globally – with rainforest investment and protection a growing trend.

Unique property experiences

The importance of exclusivity has been a feature of the HNWI

market for a long time. In a desire for experimental or unique

experiences, the desire for traditional shooting and fishing

estates is now being exceeded by more eclectic activities

attached to either primary or secondary homes.

An example of individual exclusivity is the growing interest in

properties with olive groves. 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. 

The rise of the uber-development

In London, New York and Moscow developers have been

pushing the envelope in terms of specification and construction

quality. New projects in central city areas have seen an arms

race by developers to up-spec their developments and keep

ahead of the competition. A new market has been created, with

record prices achieved, as clients find needs they never thought

they had being provided for. 

Tax havens to grow in popularity

There is aggressive positioning by governments against tax

havens. Tax lawyers and accountants remain convinced that the

ability of legislators in Europe and the US to stop tax havens

from operating in the manner in which they do is limited. 

We expect demand for property in tax havens to grow

exponentially over the short to medium term. Demand coming

out of the UK for property in Monaco and the Channel Islands

will expand steadily and will underpin prices. These locations will

outperform steadily in the future. 

No end in sight

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 strongly 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. 

Trends to watch

30

Annual Wealth Report 2007

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