On Trend: Luxury Real Estate and the Rise of Private Islands

15 August, 2018

Over the past decade, as the world has attempted to come to terms with the rippling effects of the global financial crisis, the parameters of what defines luxury in terms of real estate have shifted constantly. Stability and security have become increasingly important, as 21st-century living means adapting to the uncertainty that regularly tinges daily life on the planet, as evidenced by the changing face of politics in the US, the UK, and beyond; the rising occurrence of terror attacks from Paris to Surabaya; the chaos caused by climate change across the globe; and the constant disruptions to tried and tested ways of doing and being that rapidly changing technology brings, to name just a few examples.

Nothing is as it was. The future is unpredictable. These two realities are altering the very nature of the luxury real estate market and how home ownership is perceived by high net worth individuals (HNWIs) and ultra high net worth individuals (UHNWIs) who invest in prime real estate today. The very notion of what luxury is differs among these seemingly homogeneous sectors of society. To buyers in Atlanta, luxury conjures up images of compact, tech-enabled mansions rather than the sprawling country estates desired by buyers in Dublin. In Cape Town, buyers associate luxury with homes equipped with eco-friendly features, whereas in Monterrey, wealthy buyers covet vertical living for the security and privacy luxury apartments provide. It is in keeping with this ethos of unpredictability that, after a relatively unremarkable performance in the preceding year, sales of luxury homes flourished in 2017 and grew by an astonishing 11% — the best annual growth in three years. This result was reported in Christie’s International Real Estate’s annual white paper on the global luxury residential housing market, Luxury Defined 2018, published in May this year. CEO of Christie’s International Real Estate Dan Conn attributes this growth to “a stable global economy, a strong stock market, low interest rates, and rising consumer confidence”.

Glistering Hong Kong topped Luxury Defined's Luxury Index of the top 10 most luxurious cities for luxury real estate for the second consecutive year in 2017, spurred by two residential sales above USD 100 million and having the highest price per square foot of any urban area in the world. In second place was the ever-chic New York, while London’s timeless elegance secured third place for the city in 2017. The charming Canadian city of Victoria — the ‘Garden City’ to those who are au fait with its temperate climate — was first on Luxury Defined's 2017 list of “hottest” primary housing markets thanks to its rising luxury sales volumes and prices.

In terms of the prime second home and city residential markets, 2017 saw two clear trends: a marked slowdown in China’s top performing cities juxtaposed by renewed growth in Europe after a decade of poor results, this according to Knight Frank’s Prime International Residential Index (PIRI) 100. A notable 11% of the locations in the PIRI 100 posted returns in the double digits for 2017, and the overall index increased by 2.1% compared with 1.4% in 2016. These developments are in alignment with the growth experienced by the global economy in 2017 despite heightened political tensions the world over. The bustling city of Guangzhou, also known as ‘the Los Angeles of China’, leads the 2017 PIRI 100 — with its prime property prices soaring by over 27% — but is China’s sole entry in the top 10 in 2017.

This is in stark contrast to 2016, when Beijing and Shanghai occupied second and third places, respectively, thereby securing the top three places for China. This change of direction is attributed to the government’s clamping down on macro prudential regulations, which has served to restrict price inflation and deter speculative activity in China. Vibrant Cape Town rose to second place on the PIRI 100 in 2017, with luxury residential property prices rising by almost 20% owing to increasing demand and short supply in the ‘Mother City’, a pervasive trend in the luxury real estate arena. Aspen took third place, with property prices in the upmarket US ski resort rising by 19% last year. Lack of supply is a perennial conundrum that is made more challenging by the ever-widening pool of potential luxury home buyers. Luxury Defined 2018 reports that the number of billionaires in the world has burgeoned to 2,208 in 2018, representing a combined net worth of USD 9.1 trillion — an increase of a staggering 18% from the previous year.

Recent times have finally seen affluent millennials making their way into the luxury real estate market after years of notable absence, and they are now vying for prime properties with baby boomers who are downsizing, bringing an unlikely tension to the market. Particularly at the entry level, a plethora of buyers from a wide range of contexts and with vastly different lifestyles find themselves competing for a limited number of luxury properties. This in turn has led to much quicker selling times for luxury homes, which on average sold in 190 days in 2017 as opposed to 220 days in 2016, according to Luxury Defined 2018.

At the ultra-high end of the luxury property market, circumstances differ. Although trophy homes have certainly come to be valued as collectibles to be treasured, sales of trophy real estate declined in 2017, with just three properties being sold for over USD 100 million. In the previous year 10 were sold. The average of the 10 most expensive homes sold dropped to USD 1.24 billion in 2017 from USD 1.32 billion in 2016. The top sale in 2017 was, however, the most expensive residential transaction on record at USD 360 million in Hong Kong.

The rise of the trophy home has ushered in the phenomenon of the star architect, or ‘starchitect’ — the sobriquet given to architects who have achieved worldwide renown for their design flair. Informed buyers are seeking out starchitect-designed homes, with the possession of an inhabitable work of art considered to be the ultimate accomplishment. According to Luxury Defined 2018, star architects have practically become a prerequisite for high-end residential developments, and acquiring a Rafael Viñoly apartment, for example, is akin to possessing a Jasper Johns artwork or a classic Ferrari.

For certain UHNWIs, at the uppermost echelon of trophy real estate acquisitions is owning an island. Like rare gems, private islands are the quintessence of luxury. According to the Candy GPS Report: Island Real Estate in the Global Prime Sector, published by interior designers and property developers Candy & Candy in partnership with Deutsche Asset & Wealth Management and based on exclusive research from real estate firm Savills: “For the world’s wealthy, the pinnacle of achievement is to own what is exclusive and rare, so an island property goes hand-in-hand with a luxury apartment in a prime city.” Yet the desire to own a private island is seldom, if ever, economically driven. Instead, these are purchases of passion. Some UHNWIs are in pursuit of blissful solitude; for others the purchase of a private island is an eco philanthropic act to preserve an island at risk by restricting public access. As such, the Candy GPS Report outlines the two tiers of the private island market: 5% are “quality islands” that are close to the mainland, in politically stable regions, with development potential and permits in place, while the other 95% are “private islands” that do not meet these criteria and have limited potential for being inhabited.

Globally there are variations in the real estate market for private islands. Central and North American islands are priced lower than those in Europe (of which there are hundreds of thousands), the Bahamas, and Oceanic countries. Southeast Asia has an abundance of islands, but prices are high as they are sought after by hotel developers. The Candy GPS Report identifies further distinct regional market trends. Although sizable, the European private island market is restricted, and European buyers favor Caribbean and North American islands, particularly those conducive to winter vacationing. The Asian market, too, is small, partly because in most cases non-citizens may only purchase leaseholds. Asian buyers tend to purchase islands for generating income rather than for personal leisure. The modern phenomenon of the man-made private island is also making an impact on the market, the most famous example being The World in Dubai.

Pioneering Dutch architect Koen Olthuis has developed an ingenious solution to the problem of scarcity of quality: inhabitable private islands based on the Dutch tradition of on-water properties. His inspired brainchild, Amillarah Private Islands, extends the concept of starchitecture to the private island market. Creative genius Olthuis, who was recently named one of the most influential people in the world in a Time magazine poll, designs self sustainable, bespoke floating islands that are safe from rising sea levels and have a negligible impact on the environment. Not only are Olthuis’s islands pieces of art one can live in, they also form new habitats for sea life. Recently, Christie’s International Real Estate announced an initiative to build these portable private islands around the world for high-end consumers looking for a unique residential opportunity.

With the continuous ascendance of global citizenship, the rising number of billionaires each year, technological advances creating market opportunities in ways that were previously in the realm of fantasy, and the global economy continuing to prosper against the odds, the next decade seems destined to be a prolific one for luxury real estate and private islands in particular.

 

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