Posted by Leonard Steinberg on June 4th, 2011
A dislocation between a few “super cities” is emerging, where international money moves markets, and national counterparts that are still closely linked to economic inertia. In to-day’s Financial Times it is reported that a separation has become marked over the past two years, with strong price growth in some major capitals belying modest gains or stagnation elsewhere within their countries. SUPER CITIES now merit comparison with each other rather than to their countries. This is particularly true when analyzing the upper ends of the property market, with buyers as happy to live in any one, and often in more than one, of the narrow sub-market of functioning city states. Manhattan is a prime example, defying the trends of the rest of the USA where this week sensationalist headlines spoke of a potential ‘double dip’ in the housing market. A school such as AVENUES, the world school is catering to this exact trend.
We are seeing a virtual global continent where billionaires move markets. The next property cycle has already started, and is seeing the emergence of a top tier of global city markets where the top addresses will become ever more fought over by wealthy buyers as stores of value and secure investments. We are seeing this in buildings such as 15 Central Park West, 40 Mercer Street, 200 Eleventh Avenue and 400 West 12th Street. Sluggish economic growth, along with the expiry of the stimulus packages designed to save western economies from recession, has slowed many housing markets in the past year – while some never really recovered from the crash in 2008. Crucially, the difference between the best and the worst markets generally comes down to a simple case of over-supply during the property boom. In Florida too great a percentage of the newly built inventory was built for pure speculation or vacation homes. A third of Spain’s housing market are vacation homes. Las Vegas’ huge speculative inventory is another example.
Tight supply constraints have met surprisingly resilient demand in international financial capitals such as Manhattan and an expanding wealthy population, which has helped accelerate this decoupling effect from national markets. All the factors sapping national housing markets – a malfunctioning mortgage market, the end of the quantitative easing programme that helped pump equity into economies, rising interest rates and unemployment – have less of an impact on prime cities where equity-rich overseas investors and domestic professional services are key. Lets face it, when HOME DEPOT fires 4 check-out employees per store during a recession and replaces them with self check-out machines, those jobs never return (2,200+ stores x 4employees = almost 9,000 jobs lost forever)….but those profits go to the bottom line that fuels the wealth of the company’s shareholders, the buyers of high end real estate. Those who lose their jobs cannot replace them and suffer, and so too does the real estate market that caters to them.
In the first quarter of 2010, according to Knight Frank, average annual price growth across these four cities stood at 54.6 per cent, but had fallen to 11.5 per cent by the first quarter of 2011. Knight Frank’s overall prime city index saw a decline in the past year because of cooling Asian prices, with the average annual price growth of 6.6 per cent across all cities in the first quarter about half what it was in the same period of the previous year. While most major cities saw growth over the year, some such as New York, Moscow and Singapore have been weaker in recent months. Transactions in Asia have slowed as speculators retreat following the Japanese crisis and rising local mortgage rates. In China, the volume of primary residential sales in most of the 10 major mainland cities fell between January and February 2011 owing to new government regulatory policies. In an effort to
curb speculation in Hong Kong, the government has launched a mortgage database that may mean that banks refuse more applications from investors. There has also been some slowdown in other, more mature, prime locations, with the risk of future tax changes in Switzerland slowing growth, for example.
The strength of Hong Kong’s market has been driven by Chinese mainland investors looking for a safe haven for their emerging wealth. Prices were higher by some 80 per cent from the low point of 2008 by the end of last year. There is also a link between Chinese wealth and London or Paris, as Asian residents look for a base in Europe, and investors look for a safe haven to invest in mature and high-performing markets. There is an “insatiable demand” from investors in Asia and the Middle East for prime property to act as a store of wealth, with London top of the list followed by Paris and New York….Manhattan is also seeing a strong demand from South America. All of this is very understandable considering the profiles of the governments of these countries.
Foreign nationals accounted for 60 per cent of all buyers in the prime central London market, according to Savills, and 70 per cent of houses valued at more than £10m in 2010. Moreover, prime housing in London has a correlation with the price of gold and equities as much as any underlying national economic outlook, as house price growth is stoked by the growth in the wealth of the world’s richest people.
It is already possible to spot the correlation between the oil prices and the value of real estate in Moscow. An increase in the price of oil by $1 per barrel triggers an increase in the price of a square metre of prime Moscow real estate by $200, according to Savills. When global demand for energy resources dropped off in 2008 and 2009, the value of properties fell by around 40 per cent from the 2007 peak. The average price of real estate in Moscow was $5,700 per sq m in the first quarter of this year – more than three times the Russian average – even if the end of the rebound has meant some price declines over the past year.
Moscow is to Russia and Manhattan is to the USA what London is to the rest of the world, given the significant influx of buyers from the rest of the country seeking real estate as an investment. However, as wealthy Russians feel even wealthier with the increase of both their business and housing interests, they are also turning to the south of France and luxe resort locations in Italy. Home owners in Monaco could do as well looking at the price of gold or oil as at the economic growth of the principality. Bicycle-riding locals in Forte Dei Marmi decry the invasion of chauffer driven Maybach’s shuttling Russian trophy wives to the local Prada store.
Compared with provincial cities, the bigger, more international cities have seen bigger rises in housing prices, especially over a five-year period. London prices rose 26 per cent, against a national average of 6 per cent; Hong Kong by 95 per cent, against a Chinese market growth of 59 per cent, and a flat market in New York against a 26 per cent decline around the rest of the US. Some buildings in Manhattan have seen distinct pricing escalations in the past 2 years, and even in the past month some pricing records have been broken.
There is a widening divergence between key cities and their domestic markets based on this supply and demand imbalance. This is particularly true of prime property in Paris, London, Manhattan, Zurich, Geneva, Hong Kong and Helsinki. The top end of these markets appeal to global buyers as much as to domestic wealth, which means that their prices are capped not by national factors but by global trends. Those markets do not necessarily move as one but are aligned on a similar curve.
Nationality does play a part when it comes to currency, particularly where people are buying properties more as investments than as places to live. Pricing in London has been boosted by an additional currency advantage, given the value of sterling – something that has held back the Manhattan and wider US prime market. Overseas buyers account for only 15 per cent of the prime market in Manhattan, for example, and this is in part why it has not seen the same sort of growth as in the UK, yet the influx of the international super-wealthy seems to be growing.
Wealthy cities are not immune to the global economy and there are risks from any economic shock and fall in stock markets or commodities. There have been some falls already as houses have come off their rebound highs and reacted to localised events such as the earthquake in Japan. The financial troubles in Greece, Portugal and Spain weigh heavily on European centers.
The decoupling effect appears to be true as long as the upper levels of the international wealthy remain so. Even cash-rich investors like to use debt where possible, and the mortgage constraints and interest rate rises remain a broad impediment to housing growth. There are specific dangers in the sovereign debt in the west as well as the potential for deflation following a housing bubble in the east.
All these factors have subdued growth, rather than reversed it, and fundamentally strong demand will continue to lift prices. It is predicted that the $15,000 per sq ft barrier will be breached at some point this decade, having reached $9,000 per sq ft last year in London and Hong Kong. Manhattan’s record is closer to $ 7,000/sf, although that is an unusual number, the average being much lower. This bodes well for Manhattan where the highest end of real estate could be viewed globally as a ‘good buy’. The “virtual continent” of the wealthy is unlikely to falter too much: The creation of wealth in emerging markets over the next decade will ensure that they grow – regardless of domestic market conditions.
Manhattan is getting ready to launch some super-luxe buildings over the next few months catering specifically to this market including The Drake building on Park Avenue, One 57, the Extell building on West 57th Street, and 150 Charles in Greenwich Village. The performance of these buildings will be the next test for a market that has a short supply of full service ultra-luxe exclusive buildings.