For the richest people in the world, the proverbial flight to safety didn't just mean flocking to fixed-income instruments or cash and deposits. It also meant increasing their allocation to real estate. High-net-worth individuals (HNWIs) from the Middle East and Asia-Pacific ex-Japan, in particular, had the highest allocations to real estate.

According to the latest World Wealth Report from Merrill Lynch and consulting firm Capgemini, real estate investments picked up in 2008, rising to 18% of total HNWI financial assets from 14% in 2007, when its share had dropped by 10 percentage points from the year before. The return to real estate reflected the preference of HNWIs for tangible assets, as well as a trend towards bargain hunting.

Residential assets (excluding primary residences) made up 45% of total HNWI real estate investments at the end of 2008. Luxury residential property values dropped in 2008 to levels last seen in 2003 and 2004, prompting some HNWIs to buy.

The emerging regions of the Middle East and Asia-Pacific ex-Japan had the highest HNWI allocation to real estate investments last year at 25% and 23%, respectively. The two regions also had the greatest proportion of residential real estate last year at 54% and 58%, respectively.

Both regions have experienced an exponential boom in real estate investment over the last few years, but a steep drop in end-user demand has combined with a lack of available financing to fuel a rapid decline in prices, particularly in the fourth quarter of 2008.

Within the Middle East, the biggest change in the real estate market has been the shift in buyer profile -- from short-term speculative investors back to professional investors, who focus on cash-on-cash yield potential. Real estate in Dubai peaked in September, before falling about 25% in value during the fourth quarter of 2008.

Commercial assets made up 28% of total HNWI real estate investments last year, marginally lower than 29% in 2007.

Typically, there is little correlation between commercial and residential real estate performance, according to the report, because the key drivers of strength in each market differ. However, the financial crisis has affected drivers of demand in both markets including economic growth, rates of unemployment, consumer spending and personal income, mortgage availability, consumer confidence, and demographics.

HNWIs continued to reduce their holdings of real estate investment trusts (Reits) in 2008, however. Reit investments are generally more liquid than direct property ownership, so HNWIs were quick to sell as soon as real-estate sentiment started to turn negative. Only 10% of HNWI real estate holdings were in Reits by the end of 2008, down from 17% in 2007, and 22% in 2006. Reits continued their steady decline in performance from 2007 into the first half of 2008, before plummeting more than 50% in the second half of 2008. Reit investment fell the most in North America -- 14% of the region's overall HNWI real-estate investments. That was down 11 percentage points from 2007, but that year had seen a relatively large allocation to Reits in historical terms.

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