Where does Cyprus leave investment planning?

In a generally good first quarter for Europe, we saw better economic and financial market news and much improved confidence which started to produce a change in strategy, with parts of the investment community going “risk-on”. However, starting with Italy’s indecisive election and moving on to the Cypriot “bank sweep”, confidence has been dented in the last few weeks and attention has drifted back to the euro zone crisis, not to mention other geopolitical tensions, for example between the EU and Russia.

Some facets of the policy response in Cyprus are nonetheless likely to encourage activity in the property sector: namely the move to tax bank deposits and the imposition of exchange controls which will both lead individuals to look again at their financial planning. This could create a further flow of local and cross border investment by high net worth individuals into quality real estate.

But which locations will benefit? Safety, liquidity and diversification will be critical factors but at the same time more investors have also been asking where their risks are best rewarded and while some have questioned pricing in markets like London and Paris, recent events should remind us all why these prices are paid and in fact why pricing may improve further.

Unsurprisingly, the top cities for investment by high net worth individuals in the past 1-2 years have largely been mature markets such as London, Hong Kong, New York and Vienna, although according to RCA, Moscow was the number 2 market in 2012 (behind Hong Kong) and more emerging markets will feature in the top list over time as the number of wealthy individuals from developing markets increases. These investors will however be looking to diversify and hence the same patterns of recent demand are likely to repeat, with major established core cities remaining magnets for international capital.

Of course the choices open to investors will grow further but if we divide the factors which drive city success between those of scale and those pointing to quality and future potential, such as education and innovation, then only London and New York tend to appear on both lists (Winning in Growth Cities 2012/13) while Asian markets dominate on scale and a number of European markets emerge strongly for future potential. Indeed, looking at what city drivers may tell us about future property investment, it is perhaps that cities such as Amsterdam and Munich as well as Melbourne and Beijing should feature more highly while London and New York will remain at the head of the list for some time to come so long as they continue to develop as places to live and work.

David Hutchings, European Research Group, London

 

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