Imagine that there are three identical luxury buildings being raised, each with 10 floors, 50 units and the same high-end amenities package. One is being developed a few blocks inland from the Hudson River in Manhattan’s Tribeca neighborhood; the second is being built overlooking Hyde Park in London’s Mayfair neighborhood; and the third is being constructed in Milsons Point, across the Sydney Harbour Bridge from the city’s central business district.
Even though this fictitious project is being developed in three different global cities, each with its own luxury market variations, determining the right unit price comes down to the same two factors: the location, and the demand for what’s being built.
In each market, of course, there are price per square foot (or square meter) benchmarks that separate the super prime properties from the more typical luxury offerings, experts say. But they’re almost identical across these locales.
There are also a handful of other considerations that go into new development pricing strategies, like the unit mix, absorption rates, amenities package, and the developer’s investment, or bottom line to make a profit.
But as it goes with almost everything in real estate, “location is always the principal driver of price,” said Simon Barry, the head of new development at Harrods Estates in London.
New York: A city with many desirable locations
About 100 years ago, every wealthy family in Manhattan lived in the same general area, said Andrew Wachtfogel, head of research at Douglas Elliman Development Marketing, referring to the Upper East Side along Fifth Avenue. But that’s obviously changed. “Today, luxury developments are found all over the city,” Mr. Wachtfogel said, “which makes pricing them interesting.”
New York-based brokers generally agree that dollars per square foot is still the currency of New York real estate, with $3,000-plus per square foot being a good starting point for pricing a luxury property.
Donna Olshan, the president of Olshan Realty, who compiles a weekly snapshot of Manhattan’s luxury market, backed this up with data, and explained that the average list price for a luxury Manhattan condo in 2017 (which includes often less expensive resale properties), is $7.5 million and about $2,811 per square foot.
Getting to a more specific figure than that $3,000 per square foot benchmark comes down to considering several variables.
The first is location. In Manhattan, developments in the East Village, Harlem and on the Lower East Side, are going to be lower than $3,000 per square foot, said Dolly Lenz, the founder of Dolly Lenz Real Estate, while new offerings on “Billionaires Row” along 57th Street are going to be much higher, topping out around $7,000 per square foot. Developments in Tribeca, the Upper East Side or Greenwich Village are likely right in that sweet spot.
Within these neighborhoods, the development location, and whether it’s on a corner lot (more desirable because of better light, views and air quality) or a busy street (less desirable) is also going to factor in, said Mr. Wachtfogel. So is the development’s proximity to parks, restaurants and entertainment venues; transportation within the city and out of the city; and proximity to public and private schools and universities, he added.
Other factors to consider include whether there are iconic views; private outdoor space; and the building’s amenities, like health and wellness spaces, lounges and shared outdoor areas, all of which are specifically important in the current market, Mr. Wachtfogel said.
But while price per square foot may be the shorthand that brokers use, the problem is that this isn’t how people buy properties, said Jonathan Miller, the chief executive of Miller Samuel appraisal firm. “Buyers buy by price,” he said, noting that even if a building has a lower price per square foot than the competition, the unit price could be too high because of the individual condo’s size. “Right now,” he added, “we have a surplus of inventory north of $5 million.”
Perhaps the most important factor in pricing a new development—and the one that can impact one’s ability to negotiate down to meet the market—is how much the developer needs to sell units for to make a profit, said Ms. Lenz.
“The developer might say to us that he paid $100 million for the building, and wants $130 million out,” she said. “We calculate what that breaks down to by square foot, and get to work on determining how to price individual units.”
For instance, she said, if the units need to sell for an average of $3,000 per square foot, the penthouses might be priced in the $5,000 per square foot range, with the less desirable units on the second floor going for $2,000 per square foot. If there’s a view break on the fifth floor, where people can suddenly see the Hudson River from their windows, they’d substantially bump up everything on that floor on up. Units with private terraces also get a big price bump, she said, because they’re in demand and rare.
In today’s market, Ms. Lenz said brokers are figuring negotiations into unit pricing. “In the market we just left, we would have priced new developments based on what we wanted to get,” she said, “but because we are headed deeper into a negotiation market, we consider that when figuring out the list price.”
This “negotiation market,” in which a lot of new inventory is “very expensive and overpriced,” Ms. Olshan said, will result in a lot of winners and a lot of losers.
Developers who bought land when it was cheaper, or held onto it for decades before deciding to construct a new building may do very well, she said.
But others who paid a premium in the golden years between 2013 and 2015, likely can’t adjust their unit pricing because how much they spent on the land and the construction is just too high. “They may find that the market may not be there for their product,” Ms. Olshan said.
London: Demand for luxury properties up again due to foreign interest
In London, pounds per square foot is similarly determined in large part by a new development’s location, Harrods’s Mr. Barry said.
Proximity to Hyde Park at the very center of the city, or Green Park right next to it, is the main geographic marker that dictates price, he said. In Hyde Park’s vicinity, the neighborhoods of Knightsbridge and Mayfair are the most expensive, with units priced around £5,000 (US$6,700) per square foot and up. Some resale properties in the One Hyde Park development, which was completed about five years ago, are still achieving over £5,000 per square foot, and a newer development at 77 South Audley St. sold its penthouse for £7,500 per square foot (US$10,000 per square foot).
The Kensington end of Hyde Park is more like £4,000 per square foot, Mr. Barry said, while the north side of the park in Bayswater is closer to £3,000 per square foot (US$5,400 and US$4,000 respectively).
“In London, it’s the same old story: There isn’t that much space to build on in the central areas,” he said, so what is there is always traded at a huge premium, even in a softer market.
Areas ripe for development, where there’s more land available or warehouses to convert, include spots along the River Thames, where prices range from £1,500 (US$2,000) per square foot on the southside in Battersea, up to £2,750 (US$3,700) per square foot on the northside of the river, closer to Westminster.
Even areas that would typically be less expensive, like Nine Elms, where the new American Embassy is going up, have new developments with units priced at £1,250 (US$1,677) and up. That’s in part because they’ve established a critical mass of 300 to 500 units, and included health and leisure facilities, like theaters, pools and gyms, which allows them to create their own pricing field.
The big story in London, as in many other global cities right now, is the need for “affordable” housing, Mr. Barry said, which would start below £1,000 (US$1,342) per square foot. But at this point, that’s impossible to build anywhere in what he called “Zone 1,” meaning the most central locations that are part of the Zone 1 map on the underground transit system.
“You can’t build affordable housing on the most expensive land in the most expensive global cities,” he said. “It’s just not commercially viable.”
Plus, he continued, there’s renewed interest at the top end of the market, driven by a lot of overseas buyers who are seeing value in London right now. “Some new developments are still setting record prices,” he said, “but those record prices are just not as crazy as they might have been if the steep upward price inflation we saw around 2014 had carried on.”
Sydney: Where proximity to the Harbour Bridge and Opera House is everything
Compared to New York and London, where there’s been some oversupply, Sydney’s luxury market is booming.
“In 2017, we’ve seen more sales over A$5 million (US$3.9 million) than any time in the past,” said Peter Chittenden, the national head of residential at Colliers International.
And prices are still going up. “If you bought a new property off plan two years ago,” Mr. Chittenden said, “it’s now worth about 50% more than the purchase price.”
But just as in New York and London, location is everything. And in Sydney, it’s all about how close the development is to the Harbour Bridge and Sydney Opera House, said Ken Jacobs, principal at Christie’s International Real Estate Australia.
“The super prime location is still around Macquarie Street near the harbor and Circular Quay,” Mr. Jacobs said, noting that some properties in this area can cost from A$60,000 per square meter (US$4,380 per square foot) up to A$100,000 per square meter (US$7,300 per square foot). Although luxury properties typically start around A$40,000 per square meter (US$2,920 per square foot), Mr. Chittenden said.
Because there is extremely limited supply near the Opera House, and no available super prime land to build on, unless a developer first purchases and demolishes a commercial building in the area, new luxury developments are fanning out to other pockets in the suburbs and on the north shore, where prices continue to rise.
One of these new developments, called Newmarket Randwick, is inland about 10 kilometers from the Opera House, on a historic piece of land with 100-year-old fig trees and lots of green space, Mr. Chittenden said. When he opened the sales office last week on the first 124 apartments (out of a planned 650 over 17 buildings), he took 113 deposits with an average price of A$18,000 per square meter, or just over US$1,300 per square foot.
At another project in Bondi Junction, about three kilometers inland from Bondi Beach, called Archibald Residences, 83 of the 92 apartments sold on the first day they were listed at an average of A$23,000 per square meter, about US$1,700 per square foot. Two years ago, another project in the same location sold for A$15,000 per square meter, which shows that 50%-plus growth.
And in Milsons Point, across from the Sydney central business district, the Aqualuna project, which is about to start construction, sold at an average of A$34,000 per square meter, just under US$2,500 per square foot.
Fifteen years ago, Mr. Jacobs set a record by selling a property for A$30,000 per square meter. That price then became the benchmark for luxury until around 2012, at which point prices started rising. Today’s market could support a A$100,000 per square meter (US$7,300 per square foot) penthouse in a proposed new Wanda Development.
“This is a product that is equally appealing to the international market as it is to the local market and it’s finite,” Mr. Jacobs said, noting that Sydney can expect to see a “super penthouse with a super price,” up to A$100 million soon.
Follow Mansion Global:Facebook | Twitter | Instagram | LinkedIn | Messenger
Write to us: firstname.lastname@example.org