Elevated Investing: Navigating the Luxury Real Estate Market
While real estate investment isn’t always perceived as glamorous, the high-end property sector can certainly add a sparkle to your financial holdings. According to Christie’s International, whose 2017 survey encompassed 81 global luxury markets, sales of luxury homes demonstrated an impressive 11 percent annual increase. In select markets, a limited supply coupled with heightened demand enabled luxury housing sales to outpace those of non-luxury properties.
In the United States, a stable economic environment has been a significant catalyst for robust luxury home sales, even amidst rising interest rates and uncertainties regarding the impact of tax reforms on affluent investors.
“The current equity bull market is experiencing its longest sustained period in American history, leading to increased activity among high-net-worth individuals,” observes David Parnes, a renowned luxury real estate specialist and co-host of Bravo’s “Million Dollar Listing Los Angeles.” He anticipates that “this trend will continue to bolster portfolios and generate a wealth effect, fostering greater confidence and capital for luxury real estate investments.”
However, access to high-end property investment isn’t exclusively for the ultra-rich. “Newly generated wealth is attracting a fresh wave of buyers, including millennials,” notes Patrick van den Bossche, President of Realty Executives International.
If you’re poised to invest with the mindset of the affluent, here’s what you need to know about ascending the property ladder in luxury real estate.
Shifting Your Investment Outlook
Luxury real estate transcends the typical property investment. “While the adage ‘all real estate is local’ often holds true, it’s not the case for luxury real estate investments,” explains Jason Haber, a broker with Warburg Realty in New York. “The luxury market operates on a global scale; its buyer pool is international. Consequently, it appeals to a broader audience, thereby commanding higher prices.”
This global reach can translate into superior returns for investors.
“Luxury real estate investments often yield higher returns than the stock market with less volatility,” states James Harris, Parnes’s business partner and co-host. He asserts that real estate investors in premier markets are currently enjoying significant gains, adding that “luxury real estate values in the U.S. will consistently appreciate over time.”
Moreover, high-end properties may demonstrate greater resilience when conventional real estate sectors or stock markets falter. “Luxury real estate investments tend to recover more effectively when markets soften because they are considered highly desirable, are generally distinctive, and often possess strong intrinsic value that surpasses replacement costs,” says van den Bossche. He highlights a crucial advantage: “One significant benefit of property ownership is that it never reaches zero value, even in a severely depressed market, whereas stocks can plummet to such a level.”
Understanding Diverse Luxury Markets
While luxury real estate can generally be highly profitable, certain markets, both domestically and internationally, may exhibit greater dynamism than others.
“In New York City, there is currently a saturation of supply, which is exerting pressure on pricing,” Haber indicates. He explains that luxury properties experienced substantial value appreciation from 2013 to 2016 as a new wave of luxury condominiums entered the market. “The ‘Billionaire’s Row’ developments along the 57th Street corridor placed a definitive exclamation point on the luxury market,” Haber observes. However, “that exclamation point has since transformed into a question mark as oversupply has become a tangible concern.”
In 2017, Seattle led the U.S. in year-over-year luxury sales growth, followed by Denver, Dallas, and San Diego, according to Christie’s data. Santa Fe emerged as the most vibrant luxury second-home market, with sales volumes of properties exceeding one million dollars reaching levels not seen since before the housing crisis.
On the international front, Vancouver, Singapore, and Vietnam have distinguished themselves as some of the strongest luxury housing markets. It is therefore critical to meticulously study market trends when deciding where to allocate investments in luxury properties.
“Most major markets are currently experiencing a slowdown in luxury real estate,” cautions Edward Mermelstein, a property investment advisor and partner at One & Only Realty Holdings in New York. He points to pullbacks in still-developing nations affected by economic and political instability, such as China and Russia.
Nonetheless, Mermelstein emphasizes that in specific global cities, like London and Hong Kong, luxury real estate has a proven capacity to withstand economic downturns. “In fact, during periods of economic slowdown, the majority of luxury properties in these aforementioned markets tend to maintain their value.”
Strategic Allocation: Direct vs. Indirect Ownership
Direct ownership represents one pathway to luxury real estate investments. However, Real Estate Investment Trusts (REITs), Exchange-Traded Funds (ETFs), and crowdfunding platforms offer alternative avenues that may present fewer barriers to entry. The chosen investment method largely depends on your individual investment style, financial objectives, and the amount of initial capital you are willing to commit.
Van den Bossche advises investors exploring luxury real estate through crowdfunding to thoroughly understand the nature of their investment. Crowdfunded opportunities might lean more towards commercial, rather than residential properties, “because commercial properties tend to be more focused on capitalization rates, which are driven by cash flow from tenant payments.”
REITs can provide exposure to luxury homes, apartments, and vacation properties, as well as high-end hotels and resorts. However, the costs associated with these vehicles must be carefully weighed against their potential returns.
“Most residential REITs tend to be private syndicates established by family offices or wealth management firms,” explains van den Bossche. “They often provide some incremental marginal returns that are influenced by REIT management fees, administrative charges, and the cost of ownership.”
If you possess the financial capacity for direct investment in a luxury property, meticulous due diligence is paramount. “An investor needs to collaborate with their financial advisor to determine the appropriate level of exposure they desire in their portfolio,” Haber advises. “It’s essential to remember that luxury carries a significant price tag.”
Brothers Zach and Cody Vichinsky, co-founders of Bespoke Real Estate in Water Mill, New York, stress the importance of comprehending a property’s unique characteristics and clearly defining your ultimate investment goal.
“In most locations, investors require upwards of $1 million just to begin exploring luxury real estate options within these markets,” Zach Vichinsky states. “Once the property is secured, the possibilities are vast and can range from constructing bespoke homes, to ‘flipping’ them for a quick profit, or offering the newly acquired asset to potential renters.”
Cody Vichinsky advises investors to immerse themselves in the local market and geographical area they are buying into to identify properties likely to yield a strong return. It’s also crucial to consider your long-term vision and exit strategy from the outset.
“Being prepared to pay premium prices, managing expectations, and understanding your ROI are all crucial elements for mitigating risks,” he emphasizes. “When investing in a property that commands a seven-figure price tag, it’s imperative to ensure there’s genuine demand for what you intend to sell.”
Zach Vichinsky cautions against developing “tunnel vision” when focusing solely on luxury properties. “Maintaining a diversified portfolio should be a priority for any investor. Limiting oneself to a single market can lead to stagnation, and there are many inherent risks associated with such an approach.”