High-Value Luxury Properties: Investment Strategy VS. Sentiment

High-Value Luxury Properties: Investment Strategy VS. Sentiment

Investment Strategy vs. Sentiment

In this new series, HôM Sotheby’s International Realty Chair and CEO Mike Shapiro will explore the fascinating market dynamics, opportunities, and potential risks and challenges involved with purchases and sales of luxury real estate in coastal Orange County, California.

When choosing a home moves beyond consideration of the primary function – to serve as shelter – (albeit a beautifully-outfitted shelter, as is the case with many Southern California homes), there are several, and not mutually exclusive, drivers at play, and primary among which are investment portfolio expansion and emotion.

Predictable trends Unpredictable factors

In terms of these properties as investments — a topic we’ll look at briefly here and that will be covered in greater depth in the coming months — a few key factors currently have significant impact on the local luxury market.

First, while many of the purchasers are cash buyers at this level, for the others, mortgage interest rates continue to be near historic lows. Second, many people are realizing huge gains in the stock market and are looking to invest earnings. A third factor that’s had a tremendous influence is the growth in overseas investment in coastal Southern California. In particular, Asian investors with newfound wealth are purchasing properties at unprecedented rates: Data from various industry and business associations indicates international purchases account for more than 20% of sales for homes with prices of $2 million or more. (In the next series — how global unrest could impact local luxury real estate will be explored.)

All of these factors, however, are financially driven and strategic reasons for investment in high-value real estate. The fourth and more nebulous factor is the human element that drives the purchase of legacy properties.

Emotion moves Markets

Emotion: It’s why some brands boom and others bust and why markets sink or soar — and, ostensibly, it could be the most influential factor driving legacy property purchases.

It’s what agents, brokers, underwriters, and marketing professionals need to appreciate and appeal to for success in this highly competitive and dynamic industry. And it’s why marketing high-value properties is intended not to sell, but to seduce. Industry professionals and analysts spend copious time and resources collecting data on real estate purchases and sales, as well as studying market and economic trends behind the numbers. But what’s often lacking — in large part, because it’s nearly impossible to capture and to quantify — is hard information on the emotions that drive investment in high-value luxury real estate.

Coastal Southern California’s natural assets — incomparable scenery, climate and, of course, the Pacific Ocean — make it inherently desirable and, for more than a century, living here has been a sign of one’s personal and professional aspirations. It’s not a place for those who settle. It’s a place for those who dream and succeed.

…it could be the most influential factor driving legacy property purchases

Sentiment and Status

And when we sell highest-value properties here, we’re not selling bedrooms and bathrooms. We’re selling how a buyer associates with the brand dynamic of a community — whether it’s Dana Point, Laguna Beach, Newport Coast, or any of several prestigious, nuanced enclaves — or of a particular home. That’s why a deep understanding of the complex world of luxury-brand marketing is essential.

But what ultimately leads to a favorable or negative decision for a high-value property — when all in the class are pretty spectacular — is as unpredictable as a buyer’s mood on a particular morning or a comment overheard at a cocktail party. Given this, then, what drives these very high price points and sales isn’t found in comparisons of craftsmanship. It’s not about resale potential and comparable sales. Beyond the basic costs of materials, labor and land, the financial worth of luxury homes at this level is driven by the value we as individuals and as a society, place on prestige, paucity and sentiment. That’s what drives these markets. It’s why a buyer will spend $20 million when a property at a fraction of that cost would have exceeded any and all possible needs. It’s why that same buyer will hire a top-name decorator to furnish the home and still eat breakfast every morning on grandma’s old dishes. And it’s why metrics, models and sophisticated algorithms will never fully account for the most complex variable of all: our feelings.

HÔM SOTHEBY’S INTERNATIONAL REALTY’S sales are on target to exceed $2.5 billion for 2014 — they represent buyers and sellers locally, internationally, and are the leading source for luxury real estate in Southern California’s exceptional coastal and desert communities.