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This article was first published in Market500 May 2008

Real Estate: Super Prime Time

Tom Armitage - Zurich

While average real estate values in the United States and the UK soften, the super-prime section of the market shows little sign of slowing down. Luxury properties in London and Manhattan continue to command high prices and are selling as fast ever. Limited supply in the best locations means the values of super-luxury properties are holding up. Oil revenues and buyers from Asia have supported the market in London while an influx of foreign capital, combined with strong demand from locals, is helping to sustain the market for top-end property in Manhattan.

“Clearly, the global and national sub-prime mortgage crisis has caused concerns for the housing market in New York City,” says Shlomi Reuveni, Senior Managing Director at Brown Harris Stevens SELECT, which specialises in exclusive new developments located in Manhattan. “There are obvious concerns that these events may catch up with New York. However, the fact is that New York is an island in every way.”

The sub-prime mortgage crisis has hit U.S. real estate values hard: the price of an average single-family property in the U.S. has fallen by around 16 percent from the market’s peak in mid-2006 according to the Standard & Poor’s/Case Shiller home price index. In Manhattan, however, property is limited and wealth is omnipresent, leading to solid real estate values. The picture in the United Kingdom is similar: while national average house prices have declined for the first time in a decade, the value of luxury properties is holding firm in central London locations favoured by super-rich buyers, such as Chelsea, Belgravia, Hampstead, Mayfair and Knightsbridge.

“The residential market in the UK is very diversified and the part that seems to be demonstrating the greater degree of resilience is the super-prime segment of the market,” says James Thomas, Director and Head of Residential Development and Investment at Jones Lang LaSalle in London. “There are a number of reasons. Firstly the location: the super-prime properties tend to be located in areas with a relatively fixed supply of land and housing,” says Thomas. “The second issue is that the large proportion of super-prime buyers are less reliant on raising debt financing to fund their acquisitions.” When the outlook for interest rates is uncertain and banks are tending to be more cautious in lending money, it helps to be a cash buyer – especially when the sums involved stretch into the millions.

MANHATTAN, LONDON – PLAYGROUNDS FOR THE RICH AND FAMOUS

That both New York and London are attractive to foreign buyers reinforces the confidence that some feel for the luxury end of the market. The leading global cities for business, culture and retailing, New York and London have long drawn in buyers from other countries. “For many years, New York City has been the cultural, social and business crossroads of the world,” says Reuveni. “Now, more than ever, it has established itself as a status destination for the most discerning, affluent buyer.”

This reputation means billionaire buyers are keen to add a New York property to their portfolio as a confirmation of their wealth and international standing. “These buyers have demonstrated a willingness to pay premium, record-breaking prices quite unimaginable to relative markets,” says Reuveni. “With intense growth of wealth among Americans in past years, and changing economic landscapes in Europe, the Middle East, Asia and Russia, Manhattan has become an international residential playground for a clientele of very strong financial means.”

Some may be seeking a second, third or fourth home, says Reuveni, or a pied-a-terre or holiday home. Others might be considering buying property as a long-term investment. A similar process has occurred in London, where ultra-rich foreigners have flocked to the upmarket parts of town. “The one great beauty of London, like a lot of central European capitals, is there is a diverse population,” says Thomas. “We saw a lot of activity due to money being repatriated from South East Asia prior to the handover of Hong Kong to China and more latterly with the explosion of wealth creation in Russia.”

The recent boom in commodities, particularly in the price of oil, has driven another wave of property acquisition in both cities. “There has always been a strong affinity with the Middle East and due to the rising oil prices those buyers have more buying power in London now,” says Thomas. “There is also an increasing amount of money coming from India at the top end of the market, as witnessed by Mr Mittal’s recent acquisitions.” Buyers considering luxury homes and apartments as an investment are vindicated by the past performance of residential real estate: according to Jones Lang LaSalle, property in the UK has outperformed investments in other asset classes such as equities, commercial property and treasury products.

FIVE-STAR SERVICE

The trend towards owning multiple properties means that the ultra-rich have new expectations of the developments that they buy into. Accustomed to the luxuries of five-star hotel service, and keen to reduce the pains of owning homes on several continents, ultra-high net worth individuals are increasingly looking for luxury homes with concierge service.

In London, Jones Lang LaSalle have successfully sold a new development called The Knightsbridge where a team of luxury-hotel-trained staff are on hand to cater to the residents’ needs, be it dog-walking, dinner reservations or housekeeping chores. In New York, a development in the former offices of Tiffany & Co. at 15 Union Square West offers similar levels of service with valet parking and the option of combining units (which start at $4 million for a 2-bedroomed unit) to create bigger spaces. As Reuveni says: “Ownership of high end ultra luxury real estate in Manhattan is on the day to day shopping list of the very affluent. Overall, there is a desire to own and live in a residence that is inspired by beauty and luxury.”

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