At the Top of the World, a View of the New York Real Estate Market
Rising home values around the country are welcome news six years after the housing market collapsed. But there is a growing segment of buyers who are capable of spending so much money that they operate in rarefied space, paying prices that are rising into the tens of millions of dollars and have no bearing, on the usual rules of supply and demand.
That is especially true in some New York neighborhoods like the one along 57th Street in Manhattan, known as Billionaire’s Row. There, apartments with Central Park views have fetched in excess of $30 million. What you get is nice: three bedrooms, four baths, floor-to-ceiling views. But the price is so detached from anything comparable, save what someone else has paid for similarly opulent pad next door, that the phenomenon raises some intriguing questions:
No matter how much money you have, how would you know if you were getting a good deal?
And beyond price, what is it like to buy one of these baubles of the 0.1 percent? How different is the experience from what everyone else in the world goes through to buy a home? Are there moments when egos flared and deals got ditched? Or are the buyers so wealthy that the gargantuan sums – and even the whole experience – are meaningless?
The prevailing view is that most of the buyers are international. Many at the highest end are from South America, China and Eastern Europe, said Leonel Piraino, a broker at Douglas Elliman Real Estate. In Manhattan, their purchases are generally confined to condominiums, which are about 30 percent of the market and have laxer requirements for disclosing financial information and renting than the larger co-op market.
Regardless of where the buyers come from, Mr. Piraino said most super rich international and American buyers looking at New York real estate as an investment were aiming in the $2 million to $4 million range.
International buyers “see the U.S. as a safe place to come to invest their money even if the return is not the highest return,” he said. “They look at it as a bank account: You come here, you park your money in real estate and you assure yourself that you’re in a safe place.”
Others, he said, look at New York real estate as a long-term growth investment, where they can use the monthly rent to cover their carrying costs.
Michael, a 45-year-old London-based digital media entrepreneur who asked that his last name be withheld for privacy, has done just that.
He bought the fourth-floor apartment at 50 Bond Street in New York’s NoHo area for $5.65 million at the end of 2012 and the third floor a few months later for $5.3 million. He rents them for $21,000 and $20,000 a month, and owns them through a limited partnership.
“To be honest it was an investment decision for me,” he said, adding that he’s never lived in New York nor even spent a night in one of his condos. “London is one of those markets where property right now doesn’t offer a lot of value.”
He said he based his decision on considering the similarities of the two cities as global financial centers and then calculated that property values per square foot would have to rise 60 percent in New York to reach where they are in prime London neighborhoods like Chelsea. He could also charge enough rent in New York to cover all of his costs, including 30-year mortgages on both properties at interest rates under 4 percent.
“I’m better off borrowing at 3 to 4 percent and buying two condos,” he said. “I do think we’re going to look back in 10 years’ time and say gosh that was the most amazing opportunity of our lifetime.”
He was persuaded to buy the second property by his agent, Mr. Piraino, who pointed out that owning two 3,000-square-foot condos on Bond Street that someone else could combine was more valuable than similar apartments apart.
Yet for foreign buyers owning real estate in New York – or anywhere in the United States – their heirs can end up with a hefty estate tax bill they might not be prepared for. The exemption for nonresident aliens is only $60,000, with a 40 percent tax on real property over that. (The exception is if the United States has an estate tax treaty with the person’s home country.)
Depending on the level of wealth, buyers can set up expensive and complicated structures to own the property or they can buy life insurance to cover the estate tax. But getting that insurances is not cheap.
Bryan Schick, president of NFP BVI Ltd., an international insurance brokerage firm, said the premiums varied widely depending on the risk rating of the country where the person resides. For an A-rated country, like Britain, the annual premium for $10 million of life insurances would be about $75,000 a year. But for a C-rated country like Colombia, that premium jumps to more than $122,000 a year.
When international owners are ready to sell or buy, that transaction typically takes longer and requires more patience on the other side. Jason Walker, another broker at Douglas Elliman, just brokered the sale of a $7 million downtown loft that was owned by a Middle Eastern princess.
“It definitely added a layer of complexity to everything,” Mr. Walker said. “I had to be careful to manage the expectations of the purchaser. The offer came in during Ramadan so I stopped getting responses.”
He added, “You had American buyers, a Middle Eastern seller and European lawyers – there were cultural sensitivities.”
This is a segment of the market, the globe-spanning superrich, that real estate firms are chasing the way other luxury brands are. To that end, Douglas Elliman and Knight Frank Residential, a similar high-end, London-based brokerage firm, recently announced an alliance to serve and share clients buying property around the world – to keep them from going to different brokerage firms in different markets.
A New Yorker by birth, Marc Rappaport has a different view of the city’s booming luxury real estate market: It’s a more interesting investment than stocks and bonds. He bought three apartments in Lower Manhattan in 2012 and 2013 that ranged in price from between $1 million and $2 million to more than $3 million. He is now looking to buy a pied-a-terre in Paris, even though he doesn’t speak French. (He does have a girlfriend there.)
“I look at it more as a lifestyle,” said Mr. Rappaport, whose wealth comes from distributing mutual funds. “I could make more money in stock and bond investments. The investment performance is not the driver.”
With mortgages on two of the three New York properties, he said he was also spurred by low interest rates.
Yet at the highest end, a mortgage typically has to come after an all-cash purchase. Competition can be fierce, and that increases the pressure to pay cash for these properties or make other arrangements.
Walter Welsh, head of private banking at PNC, said consumer financial protection regulations that came into effect this year make the mortgage process much longer and more complicated, even for people with plenty of money. To get access to money more quickly, he said clients prefer to use other assets as collateral — in effect, a high-end margin loan.
Still, in this rarefied world, now is a moment when people believe strongly in luxury real estate. Some international clients are buying it for children attending college in New York, while others, like real estate investors before them, see it as an asset that will just go up in value.
"I don’t know what my exact plan is," said Michael, the London buyer. “I have fixed mortgages. I expect to hold them for 10-15 years. By that time, the rents will go up and my monthly mortgage bill won’t." Or at least that's the hope.