The Future of Wealthin South Africa

by Denisa Oosthuizen

CoverStory

e live in a countryof contrasts:extreme povertyand immense

wealth, toxic greed andbountiful generosity,desperation and hope”. Thisis how Silvana Bottega,founder of Southern AfricanLuxury Association (SALA)started her written messageto the hundreds of guestswho participated at SALA’sfirst Wealth Summit on 7and 8 March 2012, atSandton Sun, Johannesburg.In a country full ofcontrasts, with a rampantunemployment rate of 25%

In the words of Bottega,“the luxury industry has thecapacity to inspireinnovation and generateemployment”. Not only theluxury market is a providerof growth opportunities forAfricans, but the hope andaspirations of theburgeoning middle class onthe continent is anindication of better things tocome. Moreover, the high­end market has a promisingfuture, with strong growthpotential especially in themost developed Africaneconomy, South Africa, thefocus of the conference.

Designed to explore boththe state of wealth in thespecifically South Africanmarket and to identify theobstacles and theopportunities for growth, thetwo­day Summit wascomparable to aneducational manual inunderstanding how thewealthy think, live, spendtheir money and create animpact in Africa.

Marcia Klein, editor of theBusiness Times and Moneyand Careers section of theSunday Times, who hasbeen involved in thecompilation of SundayTimes’ annual Rich List inSouth Africa, which takes inaccount the assets ownedby the wealthiest, notes that“most of those who made

W

and nearly 16 million SouthAfricans dependant ongovernment’s social grantsto survive, one wouldwonder the scope andpurpose of such aconference, where African

10 WealthWise magazine

luxury was on everyone’slips, from leaders in wealthmanagements and seniorexecutives of luxurybusinesses across thecountry, from Cape Town toJohannesburg.

The Wealthy Elite

the list are self­madebillionaires and increasinglymulti­racial”.Out of a top 100, with namesalready entrenched in theSouthAfrican’sbusinessmedia– Patrice Motsepe (R23bn),LakshmiMittal(R20,9bn–onlyhis South African assets) andNicky Oppenheimer(R11,1bn), the first twentybillionaires, cumulatingaround R112bn, represent75% of the wealth distributedon the Rich List. Only 28 arelisted as billionaires (overR1bn).There are three fundamentalthings that we notice whenreading the “Rich List” of acountry. Firstly, theconcentration of wealth,which in Africa is still in thehands of fewer than insimilar emerging markets

(India and China are verygood examples). Andsecond, the weak presenceof women millionaires. Only4 women made it on theSunday Times’ Rich List,lead by ABSA group’s CEOMaria Ramos.Thirdly, when looking atsome of the biggest earnersin South Africa, we cannothelp but decry the highinequality in the earningcapacities of men andwomen. Shoprite’s WhitneyBasson tops the list at morethan R600 million annualearnings – sixty times morethan Maria Ramos’s R11million annual income. SouthAfrica’s businessenvironment is still verymuch male­dominated and itwill continue to be so forsome good decades, unlesswomen empower themselves

with financial intelligence,knowing how to createwealth through investmentsand businesses.One of the most interestingtopics discussed at the eventwas the importance ofcultural and semiotic insightson the value of status inSouth Africa. Dr InkaCrosswaite, semioticsanalyst at Added Value,looks at the different ways inwhich people give meaningto the world, in this caseluxury. She analyzes howmaterial objects, such asbrands, acquire meaning indifferent cultural contexts.“We found luxury has avariety of meanings for eachperson – it is rare, unique,exclusive; magical, of dreamvalue, flamboyant; ultimate;powerful; highly sensorial.

Photo: Africa's richest people,including South African magnatesPatrice Motsepe and NickyOppenheimerCompiled by Forbes.com andWikipedia

WealthWise magazine 11

Some see luxury as notsomething they own, butsomething they build arelationship with”, says Dr.Crosswaite.Her findings have taken thewealthy South Africa elite evenfurther in terms of culturalrelevance and aspirations. IfSunday Times’ Rich Listshowcases the asset value ofmillionaires in the country, Dr.Crosswaite’s analysis revealsthe real person behind themillionaire.Sowho is theSouthAfrican luxury consumer andwhatmakeshimtick?Andwhatdoes this reveal about thecountry’s luxury segment?AccordingtoresearchbyAddedValue, the luxury consumerbelongs to one of these fourcategories: the traditionalmoney aristocrat, theestablishedbusinessmagnate,the self­made rich and thedeluxe aspirer.The traditional moneyaristocrat has always lived aluxury lifestyle. He isprivileged, lovesclassicbrandsand prides himself in cultural,history and heritage. Theestablished business magnatehas built family wealth and acareer in banking, mining, law,retailandothersectors.Luxuryis, in his view, a way of life andthe focus is on personalpleasure. His status is anexpression of power.Moving on, the self­made richshowanambitioussideand theadvent of new wealth from

humble beginnings. The self­made millionaire prizes highquality that isworthpaying for.He has educated himself inluxury brands and hisconsumption of luxury itemsbrings his best desiredindividualism. He prizesdistinction and exclusivity.The deluxe aspirer or the go­getter is on the route to enterthe world of luxury. He favoursluxury premium goods, thriveson success, recognition andbold displays of wealth. In thiscase, luxury is not aboutknowledge, isaboutshowtime.The African luxury consumerismoreaboutthestatusdisplaythat the simplicity anddiscreetly wear of luxury.Understatements andsimplicity form a minor part inthe behaviour of African luxuryconsumer. This is a result ofthe African culture, wheredisplaying and mobilizing wasused to show the status or rankof a person.In Africa, luxury is anexpressionofpride,ratherthanexcessiveness. Unlike manyotherpartsoftheworld,sharingluxurygivesblackcommunitiesa sense of pride that othernations find difficult tounderstand. If wealthdisplaying found itself deeperin African communities, surelythis could mean morepossibilities of wealthmotivation, sharing andempowering, if done for theright reasons.

Samuel Seeff, Chairman ofSeeff Properties,acknowledges that around50% of the worldwide wealthstays in propertyinvestments. South Africanluxury property, representingthe top 5­10% listedproperties in the market,with a price tag of R20million and above, offers anattractive investment picturecompared to theinternational markets.“Worldwide, around 40% ofthe most exclusiveresidential propertiesincreased in value during2010; over 60% of theseproperties were in Asia. Corecity centers like Manhattan,New York or London Cityhold their strong value;however luxurious propertiesin developing markets arecatching up fast – SouthAfrica included”, affirmsSeeff.And the value for money isnot bad either. In London’sexpensive neighbourhood,Kensington Palace, investorspay as much as R650.000per square meters for anultra luxurious apartment. InSouth Africa, whether we aretalking about the AtlanticSeaboard or Johannesburg’sskyline, a high end propertytops R100.000 per squaremeter, at least six timesless.

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Luxury in SouthAfrican Property

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

WealthWise magazine 13

Photo: Sandthurst Towers luxury penthouse in Johannesburg (homedsgn.com),by SAORTA and OKHA Interiors

"South African

luxury property,

representing the

top 5-1 0%

properties in the

market, with a

price tag of R20

mil l ion and

above, offers an

attractive

investment

compared to the

international

markets"

A penthouse on V&AWaterfront in Cape Towncould go as far as R100million. Beyond Africa,penthouses get sold for atleast $100 million – and yes,India’s Mumbai has seenbillionaires splurging $1bnfor the ultimate luxuryproperty.So, who is buying theseproperties and where?According to Seeff Propertiesresearch, the luxurious realestate belongs to the foreignbuyers and Africa’s newwealthy elite, the so­called“Black Diamonds”. Foreignbuyers are more likely tohead to Cape Town’s Cliftonand Bantry Bay, while theblack elite will splurge inJohannesburg’s Sandton andsurrounds. What isinteresting to note is that“the number of foreignbuyers has decreaseddramatically” in the past twoyears, partly due to theglobal recessionphenomenon, which puts thenumber of foreign propertybuyers at only one of five.The most coveted propertiesin Cape Town area are inClifton, Nettleton Road(averaging between R40million and R70 million),V&A Waterfront (R30­R40million), while Sandhurst –Coronation Road (R50million), MichelangeloTowers in Sandton CBD (R20million), Hyde Park (R20million) and Morningside –Clouds End (R30 million) arethe most popular choices in

Johannesburg.“In Bantry Bay, Cape Town,

a property we sold in 1989for just R2,5 million is nowworth at least 50 timesmore, around R100 million”,said Seeff. It is easy to seethat, for the high net worthindividual, which often ownsmore than one property, theresidential real estatemarket is his playground –such properties can becomemuch more than anexpensive liability/ownresidence, but highly­regarded investments tokeep for years to come.

Should the wealthy splurgeon the property market thisyear? It’s definitely not theperfect time to sell now,according to Seeff, who saysthe past years brought amore sophisticated buyer,able to firmly negotiate inthe upper luxury residentialmarket. Beyond 2012, theaverage luxury propertytransaction will be aroundR20 million, giving theprojections in the risingnumber of South AfricanUSD millionaires, from71.000 to 250.000 over thenext five years, as estimatedby Credit Suisse.

Consumer spending is astrong indication of theeconomic growth of acountry. In South Africa,despite the recession start inearly 2008 and the millionjobs lost as an effect, theretail sector has not beentaken aback and the luxuryshopper is certainly one ofthe reasons.“Shopping malls still remainthe ultimate way to attractcustomers, with the onlineshopping experiencecatching up in South Africa”,explains Nicole Greenstone,Group Asset Manager atHyprop Investments Ltd, thecompany which owns variousregional shopping centersacross the country, includingthe high­profile Hyde ParkCorner and Canal Walk, with

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Service, thecornerstone of Luxury

Retail

premium brands for the high­end shopper.Greenstone adds that the waygoing forward for the luxuryretail market will certainly bedictated by the level of serviceand the high­end experienceoffered to the high net worthindividuals. “Service is at theforefrontofeveryluxurybrand,both in­store service and aftersales service”, she adds.Beyond2012, luxury shoppingis expected to move towardsthe all­round experience, withconcierge services replacingthe information desks,applications (apps) to locatewish items in the stores andbodyscanningtoshowthebestfitting clothing size.“Innovation is expected toenhance customerexperience. Time is theultimate luxury; by 2020 wewillbebusierthanwearetoday;shopping will be designedaroundsavingtime,fromquickaccess to parking and shopstoexpresscheckoutsandotherfacilities, such as concierge”,says Greenstone.Interestingly enough, thespending habits of the SouthAfricanwealthyeliteareboundto shift from conspicuousconsumption to conscientiousspending. This reflects anincrease in the awareness ofthe high­end consumerstowards quality,environmental protection,origins of sourcing andmanufacturing, as well as thevalue and worth of a luxuryitem.

South African luxury retailneeds to move towardspromoting more aggressivelylocal designers and retailers,as well as enhancing the socialexperience,giventhat“moneyonly makes people happier ifit improves their social rank”– thevery truthwith the luxuryconsumer.

Obviously, the Africancontinent needs to see moreand more people getting outof poverty, growing themiddleclass numbers and preferablyreachingthemillionairestatus.Even so, a raise in the numberof millionaires will openopportunities for growththrough investments andbusinesses that can generate

further jobs and growth in thelocal economy. South Africahas not had a very good start– thecostof living is increasingyearly, the tax burden onindividuals ismounting.Ontopof that, the average citizen’spersonal savings rate, aspercentage of the totaldisposable income, is ashameful 0%. Sadly, less than10% of South Africans will beable to retire comfortably.Daniel Kriel, CEO of SanlamPrivate Investments, believesthereareseveralcriticalfactorsto play in how the populationdecidestosaveandinvesttheirmoney. In a country with anoversupply of wealthmanagers and independentfinancial advisors, it is notsurprisingthatmakingtherightdecisions when it comes toWealthWise magazine 15

Photo: View of Sandton City, Johannesburg's ultimateshopping destination, with luxury brands LouisVuitton, Gucci, Boss and Salvatore Ferragamo amongothers

Growing AfricanMil l ionaires

one’s money does not comeeasy. There are commonthemes when choosing awealth manager – excellentservice, effectivemanagement, specializedadvice, trust, personalrelationship, transparency,understanding the client’sneeds and personal values. Asfor the high net worthindividuals, the feel ofexclusivity, the affinity to thebrandandtheconnectivitywiththe organization wouldprobably weight hard in theequation.Kriel is prompt to add that astudy by an executiveconsulting company revealed“significant differencesbetweenwhat clientswantandwhat wealth managersconsider important”. This is a

wake­up call for the thousandsof asset managementcompanies and financialadvisors out there, telling thattoday’s most relevant factor inchoosing a wealth manager isclient service, slowly replacinginvestment performance asthe critical quality.Financial awareness,education and trust arenecessary for the customer tochoose to invest in assets andbuild wealth under theguidanceof awealthmanager.Thankfully, high net worthclients are well aware of theimplications of investing tobuild their wealth; but this isnot necessarily the Holy Grail,since most forget that pastperformance does notguarantee futureperformance.

The choice of asset mix, or theasset allocation, as well as abalanced and diversifiedportfolio –including equities,bonds, property andcommodities ­ are one of themost important aspects ofinvesting. According to Kriel,equity exposure is estimatedto increase from 33% in 2010to 38% in 2012. Property andbonds remain a strongcomponent of the wealthyelite’s portfolios.In choosing an asset mix,Michael Jordaan, CEO of FirstNationalBank(FNB),addsthatcountry selection andcurrencies have the biggestimpact on one’s portfolio.Sector selection is paramount,since any industries, not justthe riskier technological start­ups, can be disrupted.

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Photo: Africa needs more investments in socially responsible venture andbusinesses

Understanding income needsversus capital desire is anothercritical factor. As JarredGlansbeek, CEO of globalindependent financialanalytics provider andinvestment consultantRisCura, points out, wealthpreservation is thenumberonepriority of the wealthy.“The asset class one picks isvery important. One has tounderstand the differencebetween income and capitaland be careful with inflation,which is the real enemy ofbuilding wealth”.Wheninterestratesandincomeare dropping (meaning anincrease in capital), oneshouldinvest in bonds, not cash andkeep an eye on inflation; Whencapital is decreasing, investorsshould buy cash and be carefulon asset price inflation. Capitalshould be protected with cash.Inmanagingwealth, Jordaan’sformula works best: “Embracediversity, partner withspecialists and be involved”.The latter is, in fact, thedifferential factor. “Investingis an expression of yourindividual philosophy, yourown world view. Don’toutsource all the fun of it. Havesome fun, be involved in theprocess, but cultivatedisciplinedemotions”,hesays.

Wealth is both a privilege and

a responsibility. It is also anavenue that can be usefullychanneled to enrich the livesof the less fortunate ones. InSouthAfrica, around16millionpeople live on social grants ofjust under R2000 per month,while the country has only 6,3million taxpayers. Over200.000 NGOs andphilanthropic organizationsare registered with CIPRO,doing their bit in improving thecountry’s poverty levels.However, the question stillremains: what is needed for amore effective “socialinvesting” – something thatsocial investor Marc van Olstcalls “impact investing”?Impact investing exceedscharity and giving by providinga strategic philanthropic plan,whichhas tobe financially self­sustainingforthereceiversandhavealong­termsocialimpact.Van Olst refers to a “philantro­capitalism” through socialventures and communityenterprise incubators, muchlike the successful measurestaken in Brazil to lift out peoplefrom poverty.“Reactive philanthropy has anisolated social impact. Socialgrants are social and financialvalue destructive and killentrepreneurial ideas,creating dependency on thegovernment to survive andmarketfailures”,saysvanOlst.He sees social ventures as theonly way out for poorer Africancommunities.Actively involved in impactinvesting in the past five years

in South Africa, Namibia,Botswana and Tanzania, vanOlst has spent through hisventures R10 million a year tocreate a R600 million businessgenerating regular income tomore than 100.000households, while more thanR5 million were annuallyallocated to a health mappingproject benefiting thecommunities and reducingdisease related costs. Otherinvestments included anelectricity plant, which wouldgenerate electricity (andincome!) for nearbycommunities.His projects deliver resultsbecause he treats socialinvestments the same way asregular business investments.“Build a pipeline, do yourresearch, invest with head andheart. Build platforms. Favoursimplicity. Always hold peopleaccountable.Beobsessedwiththe impact you are making.Work together with thecommunity, but be preparedfortheexit.Doit for thepeople,the real beneficiary is not theperson you are funding”, saysvan Olst.What is successful impactinvesting made of? A sharedcommunity agenda, pooledmanagement funds, acoordinated implementationmechanism, a sharedmanagement system,measurement and backbonesupport organizations. Andmost importantly:understanding thatphilanthropy is not a hobby oran accessory.

WealthWise magazine 17

The UltimateFrontier: Social

Investing

Are wealthier South Africansborn givers? According to the2010 Barclays Wealth GlobalGiving: The Culture ofPhilanthropy report, SouthAfricans are the second mostgenerous nations in givingmoney for good causes and onthefourthplaceinvolunteeringfor worthy causes. The survey,in which about 2000 high networth individuals from 20different countriesparticipated, showed thatphilanthropy is one of mostimportant priorities. 41% ofUS citizens, 37% of SouthAfricans and 32% of SaudiArabians surveyed echoedtheir support for good causes.

Poor financial health is anindication of behaviouralpsychological issues, shortterm versus long term versusthinking, living for the day andconstantlywanting to “keepupwith the Jonesses”. Thewealthy elite think and actdifferently.“The most important benefit

of wealth is the freedom andfinancial independence.Wealthy people have thefreedom to understand whatreally makes them happy”,says Andrew Bradley, ChiefExecutiveofOldMutualWealth,adding that, contrary to whatmost people are led to believe,true wealth is not money.Happiness is rather a pre­requisite of building wealth,rather than money being thepaved route to happiness.

The “Happiness Index” byOECD research, also known asthe “Better Life Index”, is agood indicator of what makespeople happy, by comparingnations across the world interms of their citizens’ well­beingandhappiness.Designedto “measure” a possiblecorrelation between wealthand well­being, the highlycontroversial survey suggeststhat lifestyle, relationships,health and careers are morevaluabletocitizensthanmoneyin itself. This could explain whyNew Zealand, a country withless GDP per person thanNorway or United States,scoredhigherinthe“HappinessIndex”. There are other similarexamples, showing that thewealth of a nation does notnecessarily indicate a happynation.What makes the wealthy elitehappiest? Bradley refers topleasures and the skills toamplify these pleasures,engaging activities, thesatisfaction of giving withmeaning and leaving a legacyto children, including teachingthemthevalueofmoney,whichis of utmost importance.“Enjoying wealth is an art”,agrees Jordaan. He believesthat wealth and happiness arecorrelated up to a certaindegree,sincehappinessinitselfcan be identified as a result ofour reaction to externalcircumstances, rather thanexternal circumstancesthemselves.The scienceof happiness is not

complicated. In doing thingsfor other people, humans findsatisfaction and a sense ofcontentment more thananything else. The richestpeople in the world wouldcertainly agree – helping anduplifting others to achievesimilar results and changinglives is certainly morepersonally rewarding than aLamborghini.

In truth, luxury was neverunknown to South Africa, oneof the top sourcing countriesfor platinum, diamonds andgold globally. Majorinternationalluxurybrandsandretailershavealready investedin Africa’s most forefrontWealthWise magazine 18

Wealth and theRoad to Happiness

"The most

important benefit

of wealth is the

freedom and

financial

independence.

Wealthy people

have the freedom

to understand

whatreal lymakes

them happy"

The Future ofLuxury in SA

economy.AccordingtoAndrewTymms, Partner at Bain &Company, South Africa is anattractive place for investors,encouraged by favourablemacro­economic drivers: asteady GDP growth, anincreasing urbanization(currently at 62%), premiumretail infrastructure, theemerging of a high­end classwith strong appetite for statusproducts and the easiness ofdoing business in the country.The Global Wealth Reportreleased last year estimatedthat the number of dollarmillionaires in the countrywould triple over the next fiveyears, to around 250.000. Itwas also reported that around116.000 wealthy members ofthe top 1% households in thecountry would own 38,5% ofglobal wealth, placing SouthAfrica as the 17th largestcontributor to global wealthgrowth. Furthermore,household wealth in Africa willincrease by more than 90% to$5,8­trillion in 2016.Last year, Europe surpassedNorth America, with 37,2% ofall millionaires worldwide. Itwould not be surprising to seeAfrican millionaires growing innumbers in the footsteps oftheir Asian counterparts,exceeding European andAmerican counterparts in theimmediate future. Until then,African millionaires will haveto step up their game and liveby thedictum“Managewealth,cultivate happiness and leavea legacy”. The last part mightnot be as easy as it seems.

WealthWise magazine 19

Photo: The road to happiness goes through upliftingothers and changing lives, not by driving the latestLamborghini

Photo: The ultimate benefits of wealth: freedom andlegacy