Real estate most preferred store of wealth; digital only 4%

At the level of the global economy, the historical link between the growth of wealth, or net worth, and the value of economic flows such as GDP no longer holds. These were the findings of a McKinsey report that borrowed a fundamental tool from the corporate world — the balance sheet — to take stock of the underlying health and resilience of the global economy.

Net worth is the store of value that determines wealth and supports the generation of future income. At the consolidated global level, net worth is equivalent to the value of real assets because all financial assets are matched by corresponding liabilities so that they net out.

The study done by McKinsey’s Global Institute focussed on 10 countries that together account for about 60% of global GDP, namely, Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the United Kingdom, and the United States.

Researchers looked at the state of the global economy after two decades of turbulence, notably the 2008 financial crisis and its aftermath, more than a decade of ultra-low interest rates and heavy central bank intervention, punctuated by the Covid-19 pandemic.

Moreover, as economies turn digital and intangible, paradoxically brick-and-mortar make up most of the global net worth at 68%, of which land contributes roughly half at 35% and dwellings and non-residential real estate contribute 33%.

Meanwhile, balance sheets have expanded rapidly over the past two decades, even as economic growth has been tepid. Despite the rise of digitisation, intangibles are just 4% of net worth. Fixed assets, excluding buildings and intangibles, account for 17%; and inventories at 8%.

A large proportion of savings has struggled to find investments offering sufficient economic returns and lasting value to investors, the report says. They have instead found their way into real estate, a traditional asset class, or into corporate share buybacks, driving up asset prices. Only about 20% of net worth was invested in other fixed assets.

Net worth tripled between 2000 and 2020 to $510 trillion, or 6.1 times global GDP, with China accounting for a third of global growth. Households are the final owners of 95% of net worth, half in the form of real assets, mostly housing, and the rest in financial assets such as equity, deposits, and pension funds. Net worth per capita ranged from $46,000 in Mexico to $351,000 in Australia. In China and the United States, the top 10% of households owned two-thirds of wealth.

This has raised questions about whether societies store their wealth productively. The value of residential real estate amounted to almost half of global net worth in 2020, while corporate and government buildings and land accounted for an additional 20%. Assets that drive much of economic growth — infrastructure, industrial structures, machinery and equipment, intangibles — as well as inventories and mineral reserves make up the rest.

The Case in India

“That certainly is not happening here in India,” says Rohit Sarin, co-founder of Delhi-based multi family offices firm, Client Associates.

Experts say that Indian money – a lot of it new age and retail — is deflecting from real estate, attracted more to asset-light tech businesses. This is a distinct divergence from the findings of the McKinsey report focused on our western counterparts.

“In India the incremental flows of real estate are decreasing,” says Sarin, “in fact people are disinvesting, or buying homes they can live in.” He says if they do sell, they are monetising and acquiring more wealth and assets for self-use and not for storing their wealth.

“In continental Europe, real estate is preferred because for them protection is a bigger goal than growth. Whereas in the U.S., growth is more important than protection and equities provide more growth than any other asset, even real estate,” says Sarin.

Sanchit Gogia, the chief analyst, founder and CEO of Greyhound Research, says money in the country is entering an array of assets and only select real estate sectors. “Indians are investing in so many things. Real estate is selling but in pockets. For instance Hyderabad (SEZ, commercial), or lets say Gurugram (commercial) in certain sectors. But a lot of money is going in mutual funds, retail investing (and these are new age investors), angel investors. All the IPOs for some of the larger companies like Paytm, etc. — most of their investors are retail investors.”

“People are flushed with savings as they stayed at home over the lockdowns. People are investing in gold, where the prices are on an all-time high. In cars, where there is a demand supply constraint; in digital start-ups. I'm not sure it’s real estate-centric. I think it is more IPO-centric,” Gogia explains.

He says the new age money is coming from the new breed of tech investors. “They are liquidating their equity. The startup guys in Bangalore have almost nothing to do with real estate. The other lot is the more traditional investors who don't understand tech, or start-ups. They will invest in businesses which are asset-backed or physical assets like real estate. They also happen to have more money and so the larger chunk will always flow into the more traditional asset-backed businesses.”

Pointing to a virtuous circle he talks about an observation, “a lot of the retail money is coming to the market because of tech and tech-backed businesses.”