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The Future of Wealth in South Africa

by Denisa Oosthuizen

W

e live in a country of contrasts: extreme poverty and immense wealth, toxic greed and bountiful generosity, desperation and hope”. This is how Silvana Bottega, founder of Southern African Luxury Association (SALA) started her written message to the hundreds of guests who participated at SALA’s first Wealth Summit on 7 and 8 March 2012, at Sandton Sun, Johannesburg.

In a country full of contrasts, with a rampant unemployment rate of 25% and nearly 16 million South Africans dependant on government’s social grants to survive, one would wonder the scope and purpose of such a conference, where African 10 WealthWise magazine

luxury was on everyone’s lips, from leaders in wealth managements and senior executives of luxury businesses across the country, from Cape Town to Johannesburg.

In the words of Bottega, “the luxury industry has the capacity to inspire innovation and generate employment”. Not only the luxury market is a provider of growth opportunities for Africans, but the hope and aspirations of the burgeoning middle class on the continent is an indication of better things to come. Moreover, the high­ end market has a promising future, with strong growth potential especially in the most developed African economy, South Africa, the focus of the conference.

Designed to explore both the state of wealth in the specifically South African market and to identify the obstacles and the opportunities for growth, the two­day Summit was comparable to an educational manual in understanding how the wealthy think, live, spend their money and create an impact in Africa.

The Wealthy Elite Marcia Klein, editor of the Business Times and Money and Careers section of the Sunday Times, who has been involved in the compilation of Sunday Times’ annual Rich List in South Africa, which takes in account the assets owned by the wealthiest, notes that “most of those who made

Photo: Africa's richest people, including South African magnates Patrice Motsepe and Nicky Oppenheimer Compiled Wikipedia

the list are self­made billionaires and increasingly multi­racial”.

Out of a top 100, with names already entrenched in the SouthAfrican’sbusinessmedia – Patrice Motsepe (R23bn), Lakshmi Mittal (R20,9bn – only his South African assets) and Nicky Oppenheimer (R11,1bn), the first twenty billionaires, cumulating around R112bn, represent 75% of the wealth distributed on the Rich List. Only 28 are listed as billionaires (over R1bn).

There are three fundamental things that we notice when reading the “Rich List” of a country.

Firstly, the concentration of wealth, which in Africa is still in the hands of fewer than in similar emerging markets

(India and China are very good examples).

And second, the weak presence of women millionaires. Only 4 women made it on the Sunday Times’ Rich List, lead by ABSA group’s CEO Maria Ramos.

Thirdly, when looking at some of the biggest earners in South Africa, we cannot help but decry the high inequality in the earning capacities of men and women. Shoprite’s Whitney Basson tops the list at more than R600 million annual earnings – sixty times more than Maria Ramos’s R11 million annual income. South Africa’s business environment is still very much male­dominated and it will continue to be so for some good decades, unless women empower themselves

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with financial intelligence, knowing how to create wealth through investments and businesses.

One of the most interesting topics discussed at the event was the importance of cultural and semiotic insights on the value of status in South Africa.

Dr Inka Crosswaite, semiotics analyst at Added Value, looks at the different ways in which people give meaning to the world, in this case luxury. She analyzes how material objects, such as brands, acquire meaning in different cultural contexts.

“We found luxury has a variety of meanings for each person – it is rare, unique, exclusive; magical, of dream value, flamboyant; ultimate; powerful; highly sensorial.

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Some see something something relationship Crosswaite.

luxury as not they own, but they build a with”, says Dr.

Her findings have taken the wealthy South Africa elite even further in terms of cultural relevance and aspirations. If Sunday Times’ Rich List showcases the asset value of millionaires in the country, Dr. Crosswaite’s analysis reveals the real person behind the millionaire. So who is the South African luxury consumer and what makes him tick? And what does this reveal about the country’s luxury segment?

AccordingtoresearchbyAdded Value, the luxury consumer belongs to one of these four categories: the traditional money aristocrat, the established business magnate, the self­made rich and the deluxe aspirer.

The traditional money aristocrat has always lived a luxury lifestyle.

He is privileged, loves classic brands and prides himself in cultural, history and heritage. The established business magnate has built family wealth and a career in banking, mining, law, retail and other sectors. Luxury is, in his view, a way of life and the focus is on personal pleasure. His status is an expression of power.

Moving on, the self­made rich show an ambitious side and the advent of new wealth from 12 WealthWise magazine

humble beginnings. The self­ made millionaire prizes high quality that is worth paying for.

He has educated himself in luxury brands and his consumption of luxury items brings his best desired individualism.

He prizes distinction and exclusivity.

The deluxe aspirer or the go­ getter is on the route to enter the world of luxury. He favours luxury premium goods, thrives on success, recognition and bold displays of wealth. In this case, luxury is not about knowledge, is about showtime.

The African luxury consumer is more about the status display that the simplicity and discreetly wear of luxury.

Understatements and simplicity form a minor part in the behaviour of African luxury consumer. This is a result of the African culture, where displaying and mobilizing was used to show the status or rank of a person.

In Africa, luxury is an expressionofpride,ratherthan excessiveness. Unlike many otherpartsoftheworld,sharing luxurygivesblackcommunities a sense of pride that other nations find difficult to understand.

If wealth displaying found itself deeper in African communities, surely this could mean more possibilities of wealth motivation, sharing and empowering, if done for the right reasons.

Luxury in South African Property Samuel Seeff, Chairman of Seeff Properties, acknowledges that around 50% of the worldwide wealth stays in property investments. South African luxury property, representing the top 5­10% listed properties in the market, with a price tag of R20 million and above, offers an attractive investment picture compared to the international markets.

“Worldwide, around 40% of the most exclusive residential properties increased in value during 2010; over 60% of these properties were in Asia. Core city centers like Manhattan, New York or London City hold their strong value; however luxurious properties in developing markets are catching up fast – South Africa included”, affirms Seeff.

And the value for money is not bad either. In London’s expensive neighbourhood, Kensington Palace, investors pay as much as R650.000 per square meters for an ultra luxurious apartment. In South Africa, whether we are talking about the Atlantic Seaboard or Johannesburg’s skyline, a high end property tops R100.000 per square meter, at least six times less.

Photo: An ultra luxury residence on Nettleton Road, Clifton, Cape Town (homedsgn.com), by SAOTA and OKHA Interiors

Photo: Sandthurst Towers luxury penthouse in Johannesburg (homedsgn.com),

by SAORTA and OKHA Interiors WealthWise magazine 13

A penthouse on V&A Waterfront in Cape Town could go as far as R100 million.

Beyond Africa, penthouses get sold for at least $100 million – and yes, India’s Mumbai has seen billionaires splurging $1bn for the ultimate luxury property.

So, who is buying these properties and where?

According to Seeff Properties research, the luxurious real estate belongs to the foreign buyers and Africa’s new wealthy elite, the so­called “Black Diamonds”. Foreign buyers are more likely to head to Cape Town’s Clifton and Bantry Bay, while the black elite will splurge in Johannesburg’s Sandton and surrounds.

What is interesting to note is that “the number of foreign buyers has decreased dramatically” in the past two years, partly due to the global recession phenomenon, which puts the number of foreign property buyers at only one of five.

The most coveted properties in Cape Town area are in Clifton, Nettleton Road (averaging between R40 million and R70 million), V&A Waterfront (R30­R40 million), while Sandhurst – Coronation Road (R50 million), Michelangelo Towers in Sandton CBD (R20 million), Hyde Park (R20 million) and Morningside – Clouds End (R30 million) are the most popular choices in 14 WealthWise magazine

Johannesburg.

“In Bantry Bay, Cape Town, a property we sold in 1989 for just R2,5 million is now worth at least 50 times more, around R100 million”, said Seeff. It is easy to see that, for the high net worth individual, which often owns more than one property, the residential real estate market is his playground – such properties can become much more than an expensive liability/own residence, but highly­ regarded investments to keep for years to come.

"South African luxury property, representing the top 5-1 0% properties in the market, with a price tag of R20 million and above, offers an attractive investment compared to the international markets"

Should the wealthy splurge on the property market this year? It’s definitely not the perfect time to sell now, according to Seeff, who says the past years brought a more sophisticated buyer, able to firmly negotiate in the upper luxury residential market. Beyond 2012, the average luxury property transaction will be around R20 million, giving the projections in the rising number of South African USD millionaires, from 71.000 to 250.000 over the next five years, as estimated

by Credit Suisse.

Service, the cornerstone of Luxury Retail

Consumer spending is a strong indication of the economic growth of a country. In South Africa, despite the recession start in early 2008 and the million jobs lost as an effect, the retail sector has not been taken aback and the luxury shopper is certainly one of the reasons.

“Shopping malls still remain the ultimate way to attract customers, with the online shopping experience catching up in South Africa”, explains Nicole Greenstone, Group Asset Manager at Hyprop Investments Ltd, the company which owns various regional shopping centers across the country, including the high­profile Hyde Park Corner and Canal Walk, with

premium brands for the high­ end shopper.

Greenstone adds that the way going forward for the luxury retail market will certainly be dictated by the level of service and the high­end experience offered to the high net worth individuals. “Service is at the forefrontofeveryluxurybrand, both in­store service and after sales service”, she adds.

Beyond 2012, luxury shopping is expected to move towards the all­round experience, with concierge services replacing the information desks, applications (apps) to locate wish items in the stores and body scanning to show the best fitting clothing size.

“Innovation is expected to enhance customer experience. Time is the ultimate luxury; by 2020 we willbebusierthanwearetoday; shopping will be designed around saving time, from quick access to parking and shops to express checkouts and other facilities, such as concierge”, says Greenstone.

Interestingly enough, the spending habits of the South African wealthy elite are bound to shift from conspicuous consumption to conscientious spending. This reflects an increase in the awareness of the high­end consumers towards quality, environmental protection, origins of sourcing and manufacturing, as well as the value and worth of a luxury item.

Photo: View of Sandton City, Johannesburg's ultimate shopping destination, with luxury brands Louis Vuitton, Gucci, Boss and Salvatore Ferragamo among others South African luxury retail needs to move towards promoting more aggressively local designers and retailers, as well as enhancing the social experience, given that “money only makes people happier if it improves their social rank” – the very truth with the luxury consumer.

Growing African Millionaires

Obviously, the African continent needs to see more and more people getting out of poverty, growing the middle class numbers and preferably reachingthemillionairestatus.

Even so, a raise in the number of millionaires will open opportunities for growth through investments and businesses that can generate

further jobs and growth in the local economy. South Africa has not had a very good start – the cost of living is increasing yearly, the tax burden on individuals is mounting. On top of that, the average citizen’s personal savings rate, as percentage of the total disposable income, is a shameful 0%. Sadly, less than 10% of South Africans will be able to retire comfortably.

Daniel Kriel, CEO of Sanlam Private Investments, believes thereareseveralcriticalfactors to play in how the population decidestosaveandinvesttheir money. In a country with an oversupply of wealth managers and independent financial advisors, it is not surprisingthatmakingtheright decisions when it comes to WealthWise magazine 15

Photo: Africa needs more investments in socially responsible venture and businesses one’s money does not come easy. There are common themes when choosing a wealth manager – excellent service, effective management, specialized advice, trust, personal relationship, transparency, understanding the client’s needs and personal values. As for the high net worth individuals, the feel of exclusivity, the affinity to the brandandtheconnectivitywith the organization would probably weight hard in the equation.

Kriel is prompt to add that a study by an executive consulting company revealed “significant differences between what clients want and what wealth managers consider important”. This is a 16 WealthWise magazine

wake­up call for the thousands of asset management companies and financial advisors out there, telling that today’s most relevant factor in choosing a wealth manager is client service, slowly replacing investment performance as the critical quality.

Financial awareness, education and trust are necessary for the customer to choose to invest in assets and build wealth under the guidance of a wealth manager.

Thankfully, high net worth clients are well aware of the implications of investing to build their wealth; but this is not necessarily the Holy Grail, since most forget that past performance does not guarantee future performance.

The choice of asset mix, or the asset allocation, as well as a balanced and diversified portfolio –including equities, bonds, property and commodities ­ are one of the most important aspects of investing. According to Kriel, equity exposure is estimated to increase from 33% in 2010 to 38% in 2012. Property and bonds remain a strong component of the wealthy elite’s portfolios.

In choosing an asset mix, Michael Jordaan, CEO of First National Bank (FNB), adds that country selection and currencies have the biggest impact on one’s portfolio.

Sector selection is paramount, since any industries, not just the riskier technological start­ ups, can be disrupted.

Understanding income needs versus capital desire is another critical factor. As Jarred Glansbeek, CEO of global independent financial analytics provider and investment consultant RisCura, points out, wealth preservation is the number one priority of the wealthy.

“The asset class one picks is very important. One has to understand the difference between income and capital and be careful with inflation, which is the real enemy of building wealth”.

Wheninterestratesandincome are dropping (meaning an increase in capital), one should invest in bonds, not cash and keep an eye on inflation; When capital is decreasing, investors should buy cash and be careful on asset price inflation. Capital should be protected with cash.

In managing wealth, Jordaan’s formula works best: “Embrace diversity, partner with specialists and be involved”.

The latter is, in fact, the differential factor. “Investing is an expression of your individual philosophy, your own world view.

Don’t outsource all the fun of it. Have some fun, be involved in the process, but cultivate disciplined emotions”, he says.

The Ultimate Frontier: Social Investing Wealth is both a privilege and

a responsibility. It is also an avenue that can be usefully channeled to enrich the lives of the less fortunate ones. In South Africa, around 16 million people live on social grants of just under R2000 per month, while the country has only 6,3 million taxpayers.

Over 200.000 NGOs and philanthropic organizations are registered with CIPRO, doing their bit in improving the country’s poverty levels.

However, the question still remains: what is needed for a more effective “social investing” – something that social investor Marc van Olst calls “impact investing”?

Impact investing exceeds charity and giving by providing a strategic philanthropic plan, which has to be financially self­ sustaining for the receivers and havealong­termsocialimpact.

Van Olst refers to a “philantro­ capitalism” through social ventures and community enterprise incubators, much like the successful measures taken in Brazil to lift out people from poverty.

“Reactive philanthropy has an isolated social impact. Social grants are social and financial value destructive and kill entrepreneurial ideas, creating dependency on the government to survive and market failures”, says van Olst.

He sees social ventures as the only way out for poorer African communities.

Actively involved in impact investing in the past five years

in South Africa, Namibia, Botswana and Tanzania, van Olst has spent through his ventures R10 million a year to create a R600 million business generating regular income to more than 100.000 households, while more than R5 million were annually allocated to a health mapping project benefiting the communities and reducing disease related costs. Other investments included an electricity plant, which would generate electricity (and income!) for nearby communities.

His projects deliver results because he treats social investments the same way as regular business investments.

“Build a pipeline, do your research, invest with head and heart. Build platforms. Favour simplicity. Always hold people accountable. Be obsessed with the impact you are making.

Work together with the community, but be prepared for the exit. Do it for the people, the real beneficiary is not the person you are funding”, says van Olst.

What is successful impact investing made of? A shared community agenda, pooled management funds, a coordinated implementation mechanism, a shared management system, measurement and backbone support organizations. And most importantly: understanding that philanthropy is not a hobby or an accessory.

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Are wealthier South Africans born givers? According to the 2010 Barclays Wealth Global Giving: The Culture of Philanthropy report, South Africans are the second most generous nations in giving money for good causes and on the fourth place in volunteering for worthy causes. The survey, in which about 2000 high net worth individuals from 20 different countries participated, showed that philanthropy is one of most important priorities. 41% of US citizens, 37% of South Africans and 32% of Saudi Arabians surveyed echoed their support for good causes.

Wealth and the Road to Happiness

Poor financial health is an indication of behavioural psychological issues, short term versus long term versus thinking, living for the day and constantly wanting to “keep up with the Jonesses”. The wealthy elite think and act differently.

“The most important benefit of wealth is the freedom and financial independence.

Wealthy people have the freedom to understand what really makes them happy”, says Andrew Bradley, Chief ExecutiveofOldMutualWealth, adding that, contrary to what most people are led to believe, true wealth is not money.

Happiness is rather a pre­ requisite of building wealth, rather than money being the paved route to happiness.

The “Happiness Index” by OECD research, also known as the “Better Life Index”, is a good indicator of what makes people happy, by comparing nations across the world in terms of their citizens’ well­ being and happiness. Designed to “measure” a possible correlation between wealth and well­being, the highly controversial survey suggests that lifestyle, relationships, health and careers are more valuabletocitizensthanmoney in itself. This could explain why New Zealand, a country with less GDP per person than Norway or United States, scoredhigherinthe“Happiness Index”. There are other similar examples, showing that the wealth of a nation does not necessarily indicate a happy nation.

What makes the wealthy elite happiest? Bradley refers to pleasures and the skills to amplify these pleasures, engaging activities, the satisfaction of giving with meaning and leaving a legacy to children, including teaching themthevalueofmoney,which is of utmost importance.

“Enjoying wealth is an art”, agrees Jordaan. He believes that wealth and happiness are correlated up to a certain degree,sincehappinessinitself can be identified as a result of our reaction to external circumstances, rather than external circumstances themselves.

The science of happiness is not

"The most important benefit of wealth is the freedom and financial independence.

Wealthy people have the freedom to understand whatreallymakes them happy" complicated. In doing things for other people, humans find satisfaction and a sense of contentment more than anything else. The richest people in the world would certainly agree – helping and uplifting others to achieve similar results and changing lives is certainly more personally rewarding than a Lamborghini.

The Future of Luxury in SA

In truth, luxury was never unknown to South Africa, one of the top sourcing countries for platinum, diamonds and gold globally.

Major internationalluxurybrandsand retailers have already invested in Africa’s most forefront WealthWise magazine 18

economy. According to Andrew Tymms, Partner at Bain & Company, South Africa is an attractive place for investors, encouraged by favourable macro­economic drivers: a steady GDP growth, an increasing urbanization (currently at 62%), premium retail infrastructure, the emerging of a high­end class with strong appetite for status products and the easiness of doing business in the country.

The Global Wealth Report released last year estimated that the number of dollar millionaires in the country would triple over the next five years, to around 250.000. It was also reported that around 116.000 wealthy members of the top 1% households in the country would own 38,5% of global wealth, placing South Africa as the 17th largest contributor to global wealth growth.

Furthermore, household wealth in Africa will increase by more than 90% to $5,8­trillion in 2016.

Last year, Europe surpassed North America, with 37,2% of all millionaires worldwide. It would not be surprising to see African millionaires growing in numbers in the footsteps of their Asian counterparts, exceeding European and American counterparts in the immediate future. Until then, African millionaires will have to step up their game and live by the dictum “Manage wealth, cultivate happiness and leave a legacy”. The last part might not be as easy as it seems.

Photo: The road to happiness goes through uplifting others and changing lives, not by driving the latest Lamborghini

Photo: The ultimate benefits of wealth: freedom and legacy

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