The Luxury High-Rise Markup

Jan 10, 2018

Why prices of property in the same communities can differ substantially

Fog blankets large sections of Downtown Dubai. Luxury residences in prime areas can be up to 25 per cent higher than the community’s average price.

Living in the same popular community in Dubai doesn’t always mean that all residents pay the same per-square-metre price range representing the intrinsic value of the properties. In fact, prices can be substantially unbalanced within the same area, depending on whether one buys into a posh high-rise or a less-sophisticated building. This phenomenon of a markup much higher than a property would merit is present all over the emirate, and buyers need to factor this in when comparing properties in a master development.

There are certain communities where hefty premiums for residences in high-rises are nothing uncommon, namely Dubai Marina, Downtown Dubai, Palm Jumeirah and other top-notch areas where prices of luxury high-rises and villas are about 25 per cent higher than the median prices in the same community — in some cases the price difference is even threefold.

http://wtf2.forkcdn.com/www/delivery/lg.php?bannerid=0&campaignid=0&zoneid=2360&loc=http%3A%2F%2Fgulfnews.com%2Fbusiness%2Fproperty%2Fthe-luxury-high-rise-markup-1.2154356&referer=http%3A%2F%2Fgulfnews.com%2Fbusiness%2Fproperty&cb=f7a6e28c8bAsked which building would be representative for such contortions, Taimur Khan, senior analyst at Knight Frank in Dubai, cites the 50-storey Le Reve tower in Marina as among those that standout with a hefty markup.

It is arguably the most luxurious residential building in the community with 80 penthouses designed as royal or presidential apartments, targeting the rich and famous.

“Le Reve registers as one of the most expensive properties in the Dubai Marina area, offering a well-finished product in a desirable area, but at a markup price” Khan tells PW.

Apartments in Le Reve command prices of up to Dh43,000 per square metre, which is at the level of Paris, New York, Lausanne and Munich. In fact, the markup can go up to 150 per cent when compared to the average prices in Marina and Jumeirah Beach Residence, which are already among the most expensive residential communities in Dubai.

There are other high-priced towers in the area, namely iconic buildings such as Emirates Crown, Cayan Tower, Bayside Residence, Silverene Towers and Al Yass Tower, where luxury apartments for at least double the median price in the area have been sold.

“Counting in more high-end buildings in this area, the average markup is 26 per cent in terms of price per square metre than the median price for the Marina area,” Khan notes.

Another popular area, Downtown Dubai, where the Burj Khalifa, the world’s tallest tower, offers residences with prices between Dh32,000 and Dh43,000 per spare metre as opposed to the district’s median sales price of Dh22,700.

“In Downtown, residences rank high in terms of demand in the prime space, with great views of some of the major attractions of the area and well-finished products. Compared to the average square-metre price of Downtown, these projects have an average uplift of around 21 per cent,” Khan says.

Where Dubai stands

The difference in prices seems to be in line with other major global cities and more mature markets.

“Newly built premium residences are anywhere between 15 per cent and 25 per cent over local embedded values in mature international markets such as London, New York or Los Angeles,” says Safina Ahmad, head of residential agency at CBRE Middle East. “Of course, in parts of these cities, it’s the rarity of a new-build opportunity that drives prices up. As one moves away from the central parts of a town, a premium remains.”

Compared to those in mature markets, luxury high-rise properties in Dubai are “possibly one of the most fragmented areas of Dubai’s real estate market”, she notes. Adding to that, Dubai is a much younger market, so the rarity factor doesn’t come into play in a big way.

A good example where the phenomenon of a markup occurs is the Dubai Creek, where the Volante Tower’s pricing surpasses almost every other residential tower in Dubai. “Volante is a prestige offering, so there is a value beyond its utility value. Every apartment ticks the super-prime box,” Ahmad says.

In Dubai International Finance Centre, Ahmad identifies “two or three residential buildings that are a standout favourite”. Within those relatively older buildings, there is a preference for upgraded apartments because buyers are looking for an improvement on the quality of the products currently being put into the market, even in high-end communities.

Another important factor for the disparity in prices within a community is that prior to the global economic downturn of 2008-09, some developers in Dubai were building with only a 25-year life span in mind. Compared to new prime buildings being brought into the market today, they now have much longer life spans, therefore, a substantially higher quality and higher prices than older buildings around them.

“These buildings are within the same micro markets, so community medians can only go so far in giving a sense of the price,” Ahmad explains. “But median prices do not provide enough information for buyers to make informed decisions about appropriate pricing levels for new premium developments.”

Knight Frank’s Khan adds that due to location, quality of finishing and amenities, premiums for prime apartments are not a surprise. “While there are new products which are of good quality in new communities, locations such as Marina, Downtown and the Palm will continue to be on the radar for buyers, given they offer existing vibrant communities with a range of facilities,” he says.

The case for investors

That said, the question remains whether paying a hefty markup in other than the most sought-after locations makes sense from an investor’s point of view, particularly in terms of appreciation and resale value. Even in Dubai, where residents know building names better than street names, there are limits. “In fact, there are ceiling prices within every micro market, and even prestige buyers are value conscious,” says CBRE’s Ahmad. “Today’s buyers, even those in the market for a luxury product, are starting to ask for details of the tangible attributes that make the product comparatively superior. As long as developers refrain from making contractual commitments to a tangibly superior product, their ability to achieve the premiums we have been seeing in Dubai will quickly start to drop.”

There is a substantial pipeline of new luxury real estate projects in Dubai, notably Dubai Creek Harbour, Bluewaters Island, Dubai Hills Estate, The Alef Residences and The One on Palm Jumeirah, Imperial Avenue in Business Bay, the 188 tower in Downtown, Hillside in Jumeirah Golf Estates, as well as various luxury towers in Mohammad Bin Rashid City. Many apartments in these developments have price tags of more than Dh10 million.

The broad variety of new premium units coming on the market means that prices for existing luxury apartments are up for adjustment.

What’s the right investment strategy?

According to Ahmad, buying property at a premium can be a good investment depending on the type of investor and the investment strategies and objectives.

“If the buyer’s goal is to buy an apartment off-plan and flip it before completion, it is likely that in a rising market developers will increasingly price this growth into their own launch values, in turn diminishing the opportunity for quick returns for buyers,” she reckons. This means that popular luxury developments in the final stages of completion normally do not have much appreciation potential.

If a buyer is buying to lease, it is important to have a realistic net yield in mind. If yield play is the buyer’s priority, the focus is likely to be on potential rental returns, factoring in service charges and other fees, which are usually higher in luxury developments.

For end users, quality is the key determining factor. Few buyers understand what the 10-year guarantee on building units includes, but this is key to understanding what the real cost of owning property is likely to be.

“Maintenance and construction defects of some sort are issues that now arise more frequently. Most of the buildings in Dubai are new, and it takes time for defects to be revealed and the likelihood is that claims will increase going forward,” Ahmad says, adding that “building codes in Dubai are excellent but as in other emerging markets, it takes a little while for enforcement efforts to catch up.”

In a nutshell, it is all about how the luxury is perceived and if a buyer is ready to pay for this perception.

“It is important for buyers to be fully aware of what the terms ‘luxury’ and ‘prime’ mean. A good building usually features a variety of quality differentials, including energy-conscious construction, as well as architectural and design merits that a brochure has not enough room for, so it overuses vague terms such as luxury,” Ahmad says, adding that buyers should pay more attention on details such as materials, aesthetic values and longevity. “Few people buy a car because of the word luxury. Their decisions are based on horsepower and other features of the car. It’s amazing that many property buyers are unaware of what materials their building is made of or what the quality of their property’s features is.”

 

Credits To The GulfNews

 

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