Asian millionaires are predicted to slash their exposure to real estate by a quarter this year, as regulatory restrictions and economic volatility rock the region's real estate market, according to a report.

In 2009 and 2010, high net worth individuals in Asia-Pacific had around 27 per cent of their assets in real estate – way above above the global average of 19 per cent, according to the 2011 Asia-Pacific Wealth Report released today by Merrill Lynch Global Wealth Management and Capgemini.

However appetite for bricks and mortar is predicted to dip as Asia’s volatile markets send property prices yo-yoing and Asian authorities reign in lending in a bid to cool the overheated market. The report forecast that relative holdings of real estate will slump to 20 percent next year amid concerns that prices of real estate in many Asia-Pacific markets are due for a major correction after the past few years’ gains.

“Many Asia-Pacific HNW individuals have long favored real estate – residential as well as other types of assets like real estate investment trusts – as an important investment vehicle,” said the report. Across the region, the majority of HNW individuals allocated the biggest single share of real estate holdings to residential investments. In China, this was as high as 70 per cent of their property holdings.

But as fears over a bubble grow, investors are swapping their mansions for fixed income and equities.

“Asia-Pacific HNWIs are likely to increase their exposure to equities and fixed-income holdings, while cutting the amount held in cash, real estate and deposits by 2012,” said the report.

Equities accounted for 26 percent of their investments in 2010, from 27 percent in 2009. HNW individuals in certain markets are highly exposed to equities. China’s HNW individuals had 42 percent of their holdings in equities, far higher than the global average, compared with 19 percent for Japan.

In the future Asia-Pacific HNW individuals are likely to increase their exposure to equities and fixed-income holdings, while cutting the amount held in cash and deposits by 2012, said the report.

Market share for wealth managers

Wealth managers are competing fiercely for market share in the region that now has the world's second largest millionaire population, after the US. But the authors of the Asia-Pacific World Wealth Report warn that as the majority of Asia-Pacific HNW individuals source their wealth from business ownership, wealth management firms that can generate enterprise value – the ability to leverage capabilities from across different business units - will be able to serve their clients better. 

More millionaires in Asia-Pacific than in other regions believe it is important for wealth management firms to create enterprise value, such as leveraging the corporate and investment banking resources, as their businesses progress through different stages. This is especially pertinent for Asia-Pacific’s ultra rich, who behave more like mini-instiutions with the depth and breadth of their wealth. 

As a result, the ultra wealthy and the entrepreneurs will likely require investment banking services as well as wealth management services.

“Implementing a comprehensive enterprise value approach in Asia-Pacific will require iteration to capture market-specific opportunities, especially in fast-growing emerging markets,” said Jean Lassignardie, global head of sales and marketing at Global Financial Services, Capgemini. 

“Among the key components will be firm-wide accountability, appropriate incentives, and integrated IT. Most importantly, firms will need to hone their strategy for each market, and not impose arbitrary standards from highly developed markets," he added.