Stashing the cash


It is not hard to notice that Islamic real estate transaction activity is down, which makes it a little tricky, as IFN’s real estate correspondent, to write each month about the latest goings-on. So, while the phenomenon is certainly not isolated to the Islamic sector of the global real estate capital market, a report just out has helped to shed light on what investors are up to at the moment instead.

Capgemini’s latest World Wealth Report provides a global analysis of high-networth individuals (HNWIs), ie those with investable assets of more than US$1 million, with respect to their number and collective wealth, as well as their current investments and investment intentions.

Firstly, showing the impact of the significant declines in all major economies in 2022, ending a decade of continuous growth, the number of HNWIs globally fell 3.3% to 21.7 million. However, some regions bucked the trend, with the number in the Middle East up 2.8%, Africa up 4.3% and Latin America up 4.7%, with strong earnings from oil and gas driving Middle Eastern growth.

With respect to collective wealth, this reduced by a similar 3.6% globally, ending 2022 at US$83 trillion. The tech stock-exposed North Americans had the biggest hit, with a 7.4% fall, while the Middle East was again helped by strong oil prices and achieved a modest 1.5% growth.

Surveying 3,000 of these HNWIs in January revealed that in these uncertain times, two-thirds were prioritising wealth preservation, which led to shifts in portfolio asset allocation. Interestingly, while real estate remained at 15%, its level for the last four years, allocations to equities were down six percentage points to 23%, fixed income (including Sukuk) down three percentage points to 15% and cash or cash equivalents up a remarkable 10 percentage points to 34%.

So, more than a third of global HNWI wealth is currently in cash, significantly up from the 25% average of the last five years, with higher returns on deposits and a reduced portfolio risk profile being obvious drivers.

This matches the sentiment among the Islamic investors we have spoken to, with no desire to sell existing real estate holdings, particularly when prices are depressed and enjoying attractive returns on deposits while waiting for the real estate markets to bottom out. But when will that be?

With interest rates driving both the deposit rates being earned on US$28 trillion of HNWI cash deposits and the profit rate that Shariah compliant investors would be paying on their senior finance, its projected future path has considerable bearing.

For the US that inflection point for interest rates could be very soon, with the forward curve showing a peak in July. For the UK, it is in December, with the eurozone in between in October.

So, barring bank collapses and escalating wars, the end may be in sight. And if cash falls back to its 25% norm, there will be US$7.5 trillion of HNWI cash looking for a new investment home or warehouse or student accommodation.

Written by Philip Churchill, first published in Islamic Finance news Volume 20, Issue 24 dated 14th June 2023.