The year 2020 was weird all around. A global pandemic raged across the globe like the wildfires in California. The stock market blithely ignored it and soared.
The supply chain was MacGyvered on the fly with duct tape and dental floss by businesses scrambling to get products out of warehouses and into peoples’ houses. Meanwhile, the technology industry Zoomed ahead.
Also, global wealth rose 7.6%. An additional 6% more people in the world moved up a rung to become official high net worth individuals (HNWIs). Six percent more people wondering where on Earth to put all that extra cash.
Places we go to find that out
The 2021 Capgemini World Wealth Report came out in June, and it’s always a must-read for prospect researchers and fundraisers alike. Where else are you going to find out that “72% of surveyed HNWIs said they have invested in cryptocurrencies, and 74% in other digital assets such as website domain names or apps”?
Five years ago, would you have thought that 72% of your top prospects would own cryptocurrency? And even more than that in other digital assets as well? For researchers, that’s really important information to know because it’s an asset we should at least mention the likelihood of in profiles, and perhaps take into consideration when we’re formulating gift capacity.
Capgemini on real estate
For the past 15 years, Capgemini has reported that real estate (not including primary residence) has been between 15 and 18 percent of HNWI investment portfolios. This information comes from wealth management companies who look at their clients’ reported asset structures.
Another annual key data source on real estate ownership by HNWIs is published by global real estate specialists Knight Frank. This year’s annual report is The Wealth Report 2021. (These two reports are absolutely free, by the way, so there’s no barrier to great information).
Knight Frank surveys private bankers, wealth advisors, and family offices to get their data.
They report that principal and second home(s) make up 24% of HNW portfolios. Additionally (?), investment properties make up 20% of their portfolio. (Or at least that’s how I read it – look for yourself at the top of page 3 and let me know if you read it differently). That would include things like REITs as part of securities holdings, I imagine. But still. That’s more real estate than we’ve accounted for in the past.
Knight Frank also shared that, despite “a reduced desire to travel, nearly a quarter of UHNWIs are planning to apply for a second passport or citizenship – a remarkable 50% growth in a year.”
They’re going to need places to live when they get to those foreign shores, right? And what better way to buy and hold that real estate than with an offshore LLC?
Quicksand
Based on a series of articles that came out last month (and are continuing to be published) by the International Consortium of Investigative Journalists (ICIJ), we’re now discovering that these resources we rely on for wealth statistics, like the World Wealth Report and The Wealth Report, might be underestimating peoples’ overall wealth and asset allocations – because they just don’t have all the data. If you read books by former HNWI Chuck Collins and former wealth advisor Brooke Harrington, you learn that UHNWIs have more than one banker. More than one wealth advisor. And w-a-y more than one lawyer. And sometimes these professionals all know about each other, and sometimes they don’t. So the totality of assets and asset allocation can be hard for them to know. According to Collins and Harrington, it’s not uncommon that the UHNWIs themselves don’t know everything they hold.
You may have heard of the Panama Papers exposé which was released in 2016 by the ICIJ. That release of over 11.5 million documents from now-shuttered Panamanian law firm Mossack Fonseca provided journalists, politicians, and lawyers with years of work to track down, re-write laws against, or represent individuals and companies that were using offshore entities to hide assets from taxation (or from spouses or other family members).
A new release of leaked information, called The Pandora Papers, was revealed last month by the ICIJ.
One of the things we learn when we read the details is that creating offshore entities for real estate holdings is a lot more common for HNW portfolio holdings than we previously thought. And it’s super cheap to do: $500 (plus lawyers’ fees) is all it takes to set up an offshore trust, so you shouldn’t think that it’s only within the realm of the super wealthy.
“Setting up companies and trusts offshore is easy, relatively cheap and, in many cases, legal. A celebrity who lives in London or Los Angeles, for example, can hire a financial service provider in a “secrecy jurisdiction” to create and register a corporation,” writes journalist Sean McGoey.
But it’s not only celebrities (like Elton John, Claudia Schiffer, and Julio Iglesias) who have created offshore trusts to hold real estate (and other assets). The Pandora Papers leak found that more than 130 of the people on the Forbes Billionaires list have offshore trusts. There are also more than 330 politicians and public officials from more than 90 countries and territories, including 35 current and former country leaders.
In the U.K. alone, the Pandora Papers reveal the beneficial owners of an estimated $5 billion of property, much of it in London, where more than 36,000 properties are owned through offshore companies.
The leaked records reveal a small fraction of the homes, hotels, factories, and other properties owned worldwide through companies and trusts set up in tax havens. One recent study estimated that real estate worth between $5 trillion and $10 trillion — or about as much as the total wealth of Spain — could be owned through offshore vehicles” – Margot Gibbs and Agustin Armendariz
Yow. That’s not nothing.
And what the ICIJ has released so far is just a small portion of what the data will eventually reveal – they’ve only had a few months to pore through it.
Oh, and by the way, I’d like to be clear that when the ICIJ talk about “offshore” – that’s just kind of a blanket term. As I mentioned in a previous blog post, North Dakota, New Hampshire, and Wyoming are jumping into the on-shore offshore market, rivaling well-established Delaware for trust creation.
… ICIJ identified more than 200 trusts settled, or created, in the U.S from 2000 to 2019, with the largest number registered in South Dakota. The trusts were connected with people from 40 countries (not including the U.S.). ICIJ identified assets in single trusts worth between $67,000 and $165 million held between 2000 and 2019. The data shows that U.S. trusts held assets worth a total of more than $1 billion. Those included U.S. real estate and bank accounts in Panama, Switzerland, Luxembourg, Puerto Rico, the Bahamas and elsewhere.” – “Pandora Papers: An Offshore Data Tsunami”
So what does all this mean for us?
Clearly it’s likely that we’re underestimating the amount of real estate – investment and additional homes – held by UHNW people we research, and probably for the upper echelons of the merely HNW, too. And using familiar sources to find out who owns a property using Lexis or county records offices is going to be increasingly tough as more of these properties are held by untraceable trusts.
What extra might be there? <throws up hands> I don’t know.
But that’s always been the bane of our work life reality, right? Doing the best we can to estimate from the little bits we can find. With the future release of more information from ICIJ’s investigations, we will over time have more information that will at least help us estimate better.
And who knows, it may blow previous real estate portfolio holdings figures out of the water and give Capgemini and Knight Frank a whole lot more to share in their great reports.
ALSO
- Grateful tip o’ the hat to UK colleague and resource maven Toby Savin who shared this (slightly old but still really useful) publicly-sourced searchable database of UK properties held in off-shore trusts from Private Eye.
- Want to learn more about how these things work in practice? Here’s one offshore real estate trust purveyor.
