Over 67 percent of the global net worth is stored in real estate and only about 20 percent in other fixed assets, according to a consulting firm, McKinsey.
A recent report by the New York-based company states that the high share of countries’ wealth in the property market is driven by the rising home prices and high construction costs.
According to McKinsey, the large share of the global wealth that is stored in the property market raises questions about whether societies store their wealth productively.
Explaining further, the consulting firm says the real assets held by households consisted almost exclusively of real estate and was fuelled by the growth in household net worth.
Household net worth grew from 4.2 times GDP in 2000 to 5.7 times GDP in 2020. Global net wealth jumped to $514 trillion in 2020, rising by $358 trillion from 2000 levels, according to a McKinsey report.
According to the recent report by the advisory firm, three major components drove the expansion in global net worth: the real estate boom and valuation gain common to all countries, except Japan; rising values of and investment in corporate assets, especially in China and Mexico; and growth in net financial assets among net exporters, those with consistent current account surpluses (in other words, accumulating net asset positions).
“We are now wealthier than we have ever been,” Jan Mischke, a partner at the McKinsey Global Institute in Zurich, told Bloomberg in an interview.
Assets that drive much of economic growth include infrastructure, industrial structures, machinery and equipment; intangibles – as well as inventories and mineral reserves make up the rest.
Aside from the real estate sector which came top on the gainers’ chart, the fixed asset with a share of 17 percent -50 percentage points gap between the values reported for the property market, inventories (8 percent), intangibles (4 percent) and produced products (4 percent) were other assets that were featured in McKinsey report.
“Real estate fuelled at least 50 percent of net worth expansion relative to GDP in all countries other than China and Japan,’ it said.
The most significant growth in real estate stock was in Australia, Canada, France, Sweden, and the United Kingdom (China saw the greatest home price growth but also had significant GDP growth, and as a result had more muted growth of real estate in relation to GDP), analyzed from McKinsey’s report.
Below are the reasons why real estate is the world’s most popular store of wealth.
Rising land/home prices
Breakdown of the McKinsey report reveals that the rising land prices, which accounted for more than half of the increased value of the global household real estate and about 75 percent of the growth in Australia and the United Kingdom, was the most significant driver of household real estate stock growth from 2000 to 2020.
“Growth in household real estate wealth stemmed from rising home prices, with the cost of land also increasing,” it states.
The increase in urbanization and rising global population are some of the reasons why there is high demand for properties and consequently the rising land and home prices, according to analysts.
Checks by BusinessDay revealed that land banking has over time shown that it is resilient to shock. Whether it’s faced with a recession like in 2016 in Nigeria or during a pandemic like in the past year five months, the prices of land remain unchanged.
The term ‘land banking’ implies almost exactly what it is. Rather than putting cash into a savings account (where it will earn 1.25 percent interest per annum in Nigeria for example) or the stock market (which has become increasingly unpredictable in recent time), some investors take an alternative approach by acquiring land, a tangible, fixed asset, one that cannot be broken, stolen or destroyed.
Explaining the reason land banking is resilient in tough economic cycles, Seth Williams, a land investor said land is “a resource with a supply that is always going down (after all, they aren’t making any more of it) and a demand that is constantly on the rise.
High construction costs
On why most countries store a large part of their wealth in real estate, McKinsey cites the product of high quantity and quality of housing high construction costs.
According to the consulting firm, the “high construction costs relative to other prices in the economy” is one of the reasons why real estate is one of the world’s most popular assets to store wealth.
Further analysis of the McKinsey report revealed that the residential sub-sector of the global real estate market got the most investment by value between the review period of 2000 and 2020.
The value of residential real estate amounted to about half of global net worth in 2020, while corporate and government buildings and land accounted for an additional 20 percent.
According to the report, land/residential real estate accounted for 51 percent of the global real estate investment in 2020, higher than the 49 percent that was reported for the non-residential arm of the property market.
The residential sub-sector of the real estate market, which attracted the most of the global net worth in the review period, also mirrors the trend that has been witnessed in the property market in Nigeria, Africa’s largest economy.
Opportunities exist for investors in residential real estate. Tokunbo Ajayi, CEO, Propertygate Development and Investment Company, confirms this, saying much of the opportunities here are in small-size residential family units.
“The reason developers and investors opt for these small-size units such as one-bedroom and two-bedroom apartments is that large-size luxury housing units cannot find buyers,” he explains.
Compared with other asset classes or market segments, the residential real estate market in many parts of Nigeria, including Lagos, Abuja, Ibadan and Enugu, remains strong and resilient to the impact of COVID-19, the 2021 half-year report on Nigerian Real Estate Market by Northcourt shows.
“The demand for gated estates within leading cities that intensified towards the end of Q4, 2020, continued for much of half-year 2021,” Ayo Ibaru, Northcourt’s COO/director of Real Estate Research, states.
According to Ibaru, the findings by Northcourt suggest a general decline in vacancy rates across Lagos and a spike in demand for assets in gated communities for security purposes.
The full re-opening of the Nigerian economy following the ease in lockdown restrictions and increase in investors’ appetite for the real estate market amid the low-interest-rate environment helped the property sector to post its highest growth in six years in the second quarter of 2021.
Nigeria’s real estate sector expanded by 2.32 percent in the third quarter of 2021, higher than the growth recorded in the third quarter of 2020 by 15.72% points, and lower by 1.53% points relative to Q2 2021, as analysed from data by the National Bureau of Statistics (NBS).
“This shows investors’ confidence in the Nigeria real estate sector as a subsector of the economy which thrives despite the current inflation and devaluation of the naira,” Freeman Osonuga, Real Estate Investor, Advisor and Best-Selling Author, says.