Smart Investors Follow Developers They Trust for Best Price, Pick of Inventory and ROI

When Witkoff, a Manhattan-based real estate investment and development firm, was ready to start selling pre-construction units in its 111 Murray Street project in Tribeca, they offered previous buyers from its West Village and Madison Square Park projects the chance to get in first.

These "friends and family" buyers, as brokers who sold the projects call them, got a few perks for their loyalty: the best price on units before scheduled increases occurred, and their pick of inventory before it started moving.

"If you’re in first, you could see prices go up by 30% before the building sells out," said Darren Sukenik, a Douglas Elliman broker who worked on all three Witkoff projects. "That’s a benefit to getting in early, especially on A-plus developments that sell out quickly."

Among those who purchased a unit in 111 Murray first was Randi Liebenthal, an agent with Town Residential and a longtime real estate investor, who also rents out the two-bedroom condo she bought with her husband in Witkoff’s 150 Charles project for about $15,000 per month.

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While the Liebenthals picked up a $7-million three-bedroom unit in the Tribeca building, which is now 70% sold and will be completed early next year, they also brought in some friends, who they told about the quality, amenities, professionalism and unit appreciation that came with buying in a Witkoff development.

Another Witkoff loyalist, who purchased four units at 10 Madison Square Park West picked up another four early units in 111 Murray, too. In total, almost 10% of the $2.45 billion in sales that will be generated by the three projects—or $228 million in total—will be from buyers who own in multiple Witkoff buildings, said Lauren Witkoff, the company’s executive vice president.

This investor loyalty makes good sense, said Gary Gold, executive vice president of Los Angeles’s Hilton & Hyland, a real estate brokerage in Beverly Hills.

"If you’re doing something and winning one time after another, you’ll want to continue winning," Mr. Gold said. "So, it goes without saying that if you’re making money when you invest with a developer and are happy with the relationship, there’s no reason to go anywhere else."

Typically, this approach of following a developer from one project to another comes in a few varieties, of which this Witkoff example fits into the first: buying a unit or units in a new development early, thereby getting the best price, and either using those units, renting them, or re-selling them for a profit.

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While this strategy can work well for a buyer, it also works well for developers, said Dan Kodsi, a real estate developer who’s currently working on the Paramount Miami WorldCenter project downtown.

"Initially when you’re starting a project, you want to have those go-to buyers that you know are going to buy pre-construction," Mr. Kodsi said, because these sales show the project will likely be successful—essential for securing financing.

When it came to launching the WorldCenter project, which will be delivered in 2019, he relied in part on satisfied buyers from the Paramount Bay project in Miami and Paramount Fort Lauderdale Beach project to follow him, and the brand.

Some of these Paramount brand loyalists have inquired about taking on a new role in future developments, and asked about making a more significant investment and becoming equity partners, said Peggy Fucci, the CEO of Miami-based real estate consulting firm OneWorld Properties, which is working with Mr. Kodsi on WorldCenter.

"We see that there’s an appetite for this type of diversification," Ms. Fucci said, particularly from people who are interested in the future of the Paramount brand, and want to take advantage of unit appreciation, but don’t want to manage renting out multiple units in the building. Now, the challenge is to figure out a way to make this work from a business perspective, she said.

Other experts said they’ve seen this phenomenon, too, and this progression or graduation from investors purchasing individual or multiple units early in a new project, and betting on the building’s potential, to looking to invest directly with the developer, and put their faith in his or her work or the brand.

One place where developers are happy to work directly with investors and form a business relationship is in Los Angeles, where there are hundreds of spec builders who need capital prior to construction, Mr. Gold said. He noted that this is a very different investment model, one that likely appeals to a different type of investor, who’s more interested in forming a long-term relationship with a developer than managing and re-selling property, like the person buying early inventory.

"When you’re giving money to a developer, you’re going into business with that person, and it’s an immediate thing," he said. "You’re putting money in, and when you sell the house, you’re either getting a return or not getting a return."

These relationships often start via word of mouth, or when a business manager introduces a client who’s looking to diversify their portfolio to a developer. Before that developer can start building, they typically take out a loan for a portion of the cost and pay the balance in cash, some of which might come from this investor, or silent partner.

Once the project is complete and returns come in, the investor typically has a preferred return, where they get their money back before the developer takes a cut, and then they split the profit. In some cases, that might mean a 15% return on investment for a project that’s $3 million to $5 million in a neighborhood where there’s a natural market, or much more for a spec build that’s $30 million to $40 million, where there are more variables at play.

"Whether it’s commercial or it’s residential, if you find a guy that you’re having success with and you trust him, you’re not going to stop playing that hand if you’re intelligent," Mr. Gold said.

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The only downside of this type of arrangement is that if an investor trusts a specific developer who they’ve had luck working with in the past, there’s no guarantee that the returns will continue.

While these models are different, experts agree that they both come down to an investor’s desire for certainty, and knowing what to expect.

It’s why Witkoff is already hearing from past buyers chomping at the bit to purchase in their as-yet unreleased residential units in the new Edition Hotel & Residences project across the country in West Hollywood. While formal sales for the 20 Witkoff units are supposed to start in September, Ms. Witkoff anticipates they’ll offer some to friends and family a few weeks earlier.

As to why their buyers are so loyal, Ms. Witkoff said it’s straightforward. "Our buyers see a good return on their investment in prior developments, and can trust in the quality of our work," she said. "We have a successful formula, and with each project, we take the design and amenities to a new level."

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Here is a look at other news from around the world compiled by Mansion Global:

Transactions Slow, Sellers Chopping Prices in Beijing

Tight new government controls—including caps on mortgage lending, and an 80% down payment requirement—appear to have had their desired effect in Beijing, with transactions on the secondary market slowing dramatically, and numerous sellers dropping prices. Monthly sales transactions hit a 28-month low in June, according to agent 5i5j, and more than 80% of sellers were dropping prices, according to property agent Homelink, compared to three months prior, when 80% of sellers were raising prices. Similarly, a report from local property agent Maitian showed 60% of listings posted between March 17 and June 11 lowering prices, though only 5% offered discounts of more than 1 million yuan. (South China Morning Post)

Financial Secretary Calls Hong Kong’s Overheated Market a "Dangerous Situation"

Financial Secretary Paul Chan expressed concerns about Hong Kong’s property market in a recent interview, thanks in part to an expected rate hike from the U.S. Federal Reserve, which would significantly affect borrowing in the city, which is tied to U.S. monetary policy. "No one can tell how deep the adjustment will be or what is the appropriate level of adjustment,." Mr. Chan said on Bloomberg Television. However, Mr. Chan also noted that the city’s strong financial system can weather a market correction, and that experts don’t expect anything near the area’s housing bubble burst of 1997. (Business Times)

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Sprawling Coral Gables Waterfront Spec Home Hits Market for $14 million

A 7,398-square-foot, seven-bedroom new construction spec home by Chilean developer Condores Capital has come on the market in Coral Gables for $14 million. The property includes 171 feet of water frontage, an infinity pool, a spa, a rooftop terrace, a "floating master bedroom," and spacious, open living areas both indoors and outdoors. Other high-end touches include Ecuadorian wood doors, Italian Calacatta marble in the kitchen, and natural stone from Spain on the building’s exterior. (Curbed Miami)

For Third Year Running, B.C. Sales Volume Expected To Exceed 100,000 Units

Even with an expected 10% drop in sales volume from last year, the British Columbia Real Estate Association predicts sales volume reaching 101,000 in 2017, marking the third year in a row that volume has exceeded 100,000 units. The prior year, 112,200 units were sold in B.C., but even a slight drop would put sales well ahead of the 10-year average of 84,7000 units. Analysts say the area market has largely bounced back from the dip in demand caused by cooling measures, and tight supply is keeping prices high. The Association’s chief economist predicts a 1.1% decline in average residential home prices in B.C. for the year—down to $683,500—but an increase of 5.2% to $719,100 in 2018, thanks in large part to condo sales in the metro Vancouver area. (Vancouver Sun)

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Qatari Royal Purchases at 737 Park Avenue—At a Discount—For $20.5 Million

Hessa Hamad KH H Al-Thani, a member of Qatar’s ruling Al-Thani family, has snapped up a five-bedroom, seven-bathroom unit in Macklowe Properties’ 737 Park Avenue, according to public records, paying $20.5 million, a steep discount from the original $27 million. The unit at 737 Park had been on the market since 2013, after Macklowe converted the pre-war building from rentals to condos. All told, the unit measures 6,111 square feet, with 102 feet of Park Avenue frontage. (The Real Deal)

Melbourne Price Growth Headed for a Slowdown

Melbourne’s years-long boom in home prices is expected to stall over the next few years, with BIS Oxford Economics forecasting just a 5% increase in the median house price over the next three years, and a 3% decline when the effects of inflation are removed from the calculation. The firm also expects the median unit price to fall by 4% in the same period, or 11% with inflation taken out of the equation. It would be a dramatic turnaround from the three years leading up to February 2017, in which the city’s median house price rose 23.1%, and the median unit price rose 5.6%, according to numbers from CoreLogic. The turnaround is likely an effect of stricter lending regulations and decreased international investment. (news.com.au)

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For First Time Since 2009, U.K. Home Prices Decreased in June

While June is typically a robust month in the U.K. property market, for the first time since 2009, housing prices declined somewhat this month, according to data from Rightmove’s housing price index. The company’s numbers show a 0.4% decline in asking prices between May 14 and June 10, compared to a 1.2% increase in the previous month. With uncertainty surrounding the recent election and murky plans for Brexit proceedings, the trend is expected to continue, experts say. (City A.M.)

L.A. Home Prices Surpass Pre-Recession All-Time High

Los Angeles County median home prices have officially risen beyond the previous high set during the 2007 housing bubble, surpassing the previous record of $550,000 to reach $560,500 in May, according to numbers released by CoreLogic. The area’s steadily rising prices are thought to be the result of an improving economy, low mortgage rates, rising rents, and low supply. While the median is 11% below the 2007 record when adjusted for inflation, interest rates at near historic lows mean that the monthly mortgage payments are far more affordable for typical buyers than they were previously—only 9% of L.A. county households could afford a median-priced house in 2006, compared to 29% in early 2017, per calculations from the Realtors. (Los Angeles Times)

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Dubai and Abu Dhabi Markets Becoming More Expensive For Expats

In spite of recent market slowdowns tied to cooling oil prices, both Abu Dhabi and Dubai have risen on the list of the world’s most expensive cities for expats, according to the latest ranking from management consultancy Mercer. The ranking tracks various cost of living metrics in 400 cities worldwide, and saw Dubai move up from 21st to 20th this year, and Abu Dhabi jump from 25th to 23rd. The rankings found that the costliest city in the world for expats is currently Angolan capital Luanda, while a number of African cities are seeing steep increases in cost of living, as well. (Gulf News)