Hedging Inflation: The Luxury Sector Stays On the Hot List
Despite economic headwinds like rising inflation, the luxury property sector remains resilient as buyers expand their portfolio to hedge against uncertainties.
While the geopolitical situation in Europe and East Asia is going in all the wrong directions, the stock markets gyrating and just a few weeks ago the S&P 500 capped its worst first half in more than 50 years. It is still not clear if we are in a recovery or before another major drop. Contrastingly, the property market is going strong.
In “normal” times I would suggest that the property market might follow the stock market slump. However, what I see so far is that demand is increasing from rentals as well as from buyers and investors, with emphasis on the higher end of the spectrum. Furthermore this exuberance, strong demand and price increase seem to be all over the usual property hotspots.
Home prices in the US continued to climb across the country in the second quarter, when buyer demand started to ease due to higher mortgage rates, but still exceeded the property market’s low supply. Note these are not just the usual property darlings such as San Fransisco and Manhattan. This demand and prices are up for the entire country.
The US also experienced double-digit-percentage price increases earlier in the year. Median prices rose by more than 10 per cent from a year ago in majority of the 185 metro areas. In New York, London and Paris, people chase properties for rent and for sale. Many locals are priced out of their own cities.
In London, a widespread shortage of available properties has pushed up prime prices by some 5 per cent since the military activity between Russia and Ukraine. And this is despite Russians not buying as they are careful not to get into political complications, and on the other hand they are also not selling, thus contributing to the shortage of luxury property. In February, the UK scrapped its “golden visas” for wealthy investors and in May announced plans for a new economic crime bill, intended in part to identify the owners of property and combat illegal finance, although some say loopholes remain.
Portugal’s home prices rose some 15 per cent from a year earlier in the first quarter, according to the country’s statistics institute. That’s the biggest increase since the institute started collecting data on the housing market in 2010. Portugal’s government has excluded property purchases in Lisbon and Porto from its golden visa programme, to try to regulate demand.
The craziest stuff is happening in Israel’s capital Tel Aviv, where a couple of penthouses were sold at US$62,000 (S$85,000) per sqm, which is higher than the “normal” prices for luxury apartments such as the over 60 deals that were reported so far in the Mandarin Oriental Residences in the range of US$37,000-45,000 per sqm. And mind you, the regular unit sizes are 145 and 245 sqm so the deals are in many millions of dollars per unit. I understand that at the last year’s sold-out Kempinski Residences, the prices were “only” just under US$50,000 per sqm. Tel Aviv leapfrogged into the number one place as the most expensive city on earth, dethroning Singapore and Paris. There is an explanation for this: the Israeli economy is growing fast compared to other developed countries, while its inflation is below the average of OECD countries.
Meanwhile in Asia, with China and Hong Kong still stuck in post-covid travel restrictions, their citizens are dreaming of going places. An estimated 10,000 high-net-worth individuals (HNWI) in China are looking to emigrate to other countries as early as this year according to some immigration consulates. Naturally, each family will seek to move vast amounts of money with them and given the big numbers of HNWI that want to move out, the figures are in many tens of billions of dollars.
One such consultancy is London-based Henley & Partners, which said that while they are not sure about the exact number of the 10,000 HNWI who made net outflows, about 4,200 had already moved abroad between January and June this year, They estimate that over 500 Chinese HNWI will migrate to Singapore this year.
But then how many higher middle-class people will try to emigrate from China and Hong Kong? The numbers could be much higher. All these people will naturally rush to buy property in their new countries of residence, be it the main cities of the US, Vancouver, London or Singapore, just adding to the already exorbitant demand for higher-end properties in these areas.
Sales of luxury condos in Singapore are going strong despite draconian cooling measures. The local government is keeping the local property market in a sane price range by applying insane purchase tax on foreigners at the rate of 30 per cent! Still, The Nassim, a fancy condo project recently successfully sold a four-bedroom unit for S$20 million to a buyer believed to be Chinese.
In June earlier this year, Canninghill Piers located in Fort Canning also had a buyer from China who bought 20 units at one time — all three-bedroom and four-bedroom large-sized units. The total transaction value was estimated to be more than US$62 million. Mind you, the additional purchase tax on this purchase was some US$19 million and that is in addition to the US$2.2 million regular purchase tax. The buyer may also buy 10 more units, bringing the total transaction value to more than US$73 million, that is excluding taxes.
Can you imagine where the luxury condo prices will go when additional HNWI from China, Hong Kong and Taiwan will join the buyers and renters ranks?
This exceptional growth in demand is not unique only to the cities. It is also well felt in resort properties. I always recommend having such property in one’s property investment portfolio and I enjoy such properties myself. Buyers of luxury resort projects love the exclusivity factor, along with quality management, security, privacy and assurance that their investment is well-taken care for during the off-season period or during exceptional times like a pandemic. Nowhere else is the demand as strongly pronounced strongly in Phuket, the darling of Asian resorts.
I have heard of deals over US$5 million that were transacted this year at their highest ever. Unfortunately there is no official data to check upon, but I am informed of a string of deals in amounts of US$5-20 million. One can only guess that it might be Russian buyers, who are not sanctioned in Thailand and the UAE. These buyers might be behind the luxury properties flying off the shelves in Phuket and Dubai. And right now, it’s exceptional not only in pricing but in how quickly these properties sell.
- READ MORE: Phuket Mega Villas Enjoying Brisk Sales
I find a correlation between luxury big-ticket items and luxury property. And here is some interesting data to demonstrate my point. Rolls Royce numbers are on track for another all-time high this year after delivering a record 5,586 cars worldwide in 2021. Their order books are full until well into 2023, and sales are up 7 per cent in the first half of this year compared to the same period in 2021. Interestingly, the demographics changed a lot among the buyers. Rolls-Royce now has the youngest customers within the BMW Group, with the average buyer now just 43 years old. This means that even Mini drivers tend to be older.
The CEO of Rolls Royce thinks it’s far easier today if you’re bright enough to accumulate wealth and earn money in the early years of your life. But I think it’s much easier today to spend money accumulated by the previous generations, as well.
Eventually there will be a slowdown in the transactions in the property markets. But the high-end properties will be more insulated from the price drops. Rising prices of luxury, and here I mean the real big-ticket items, have attracted more buyers, who also consider these luxury items as some hedge against inflation, of sorts.
Alexander Karolik Shlaen, Executive MBA, is the founder of the Singapore-based Panache Management Pte Ltd which represents Aston Martin Interiors, Tonino Lamborghini Casa and Formitalia design lines in Asia. Panache Management is involved in real estate and technology investment projects and provides luxury interiors and designs for exclusive real estate, private jets and superyachts. Shlaen has appeared in various regional and global media and has written the Luxury Expert columns of regional business magazines since 2009. He was also the chairman of the judges’ panel for Asia Property Awards and is frequently sought to attend established business forums. Learn more on PanacheManage.com
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