The ‘Extra’ in Luxury Real Estate & Why it is Working
Real estate mainly involves the development of a building or purchase of a parcel of land with an aim to use it for home ownership or commercial services aiming to benefit from future capital appreciation and rental income. Real estate is currently the most attractive investment asset class for both homeowners and investors since it has outperformed other asset classes in the last 5 years generating returns of over 25.0% p.a, compared to an average of 11.9% in the traditional asset class. Given the attractive returns, and the public appreciation, the real estate sector has witnessed the rise of new trends, one being Luxury Real Estate. Luxury Real Estate (LRE) refers to the development of property designed to fit the High Net Worth individuals with a net worth exceeding USD 1.0mn excluding their primary residence in terms of architectural design, amenities and location aspects.
Luxury real estate as a trend is driven by the growth of High Net Worth individuals, who have grown by approximately 93% between 2006 and 2016 to 9,400 people from 4,900 people. Other factors influencing this trend are changing tastes and sophisticated lifestyles, due to exposure to international designs and trends, thus creating demand for lifestyle products in Kenya.
These Luxury Real Estate products are coupled with, the “Extra” aspects in order to appeal to the target clientele. These aspects are mainly;
Luxurious architectural and structural design -This involves specifications in architectural designs as well as finishing. Luxury real estate exudes exclusivity as they adhere to high and modern finishing standards and layout that resonates with and are appreciated by the targeted tenants. For example, while standard houses may use ceramic tiles for flooring, standard windows and 7 feet ceilings heights, luxury apartments use above standard material such as natural marble, bay windows, high ceilings, and decorative fireplaces among others.
Amenities and Façade – Luxury developments offer comfort and convenience that comprehensively support the lifestyle of the buyers such as advanced security measures and recreational facilities such as a clubhouse, swimming pool, a lounge for guests, gym, sauna and steam baths. In addition, they are located in close proximity to convenience stores, entertainment areas, shopping malls and hospitals among other social amenities which provide convenience for the residents.
Larger Unit Sizes - Residential developments in the luxury market segment generally provide more space compared to the standard house size due to additional rooms such as pantries, laundry room, TV-rooms, study area, walk-in closets and large balconies. For example, while the average size of standard 3-bedroom units in Nairobi and its metropolitan areas stands at 150 SQM, the average size of a 3-bedroom luxury apartment is 222 SQM, while for commercial properties such as offices and retail space, luxury developments provide greater circulation areas and parking bays on a ratio of 3:1000sqft.
Luxurious marketing strategies – The Luxury Real Estate marketing focuses on the High Net Worth who need to feel that the product is a physical manifestation of luxury. The marketing aims at outlining the convenience, elegance, sheer opulence that becomes a piece of one’s life when he or she buys and the happiness they inspire.
Luxurious client service – Luxury Real Estate involves dealing with Ultra-High-End individuals who demand personalized one-on-one live service that consistently demonstrates intelligent, receptive, engaging, friendly, caring and genuinely interested attention to their requests. This type of client service involves updating the clients on projects progress, market reviews and engaging them while designing the products through factoring in the feedback given.
These extra factors, however, increase the construction costs, which translates to high pricing, however, it is not hindering the uptake, given that developments such as Le Mac, Garden City, One General Mathenge, Signature, and Montave are still under construction and have recorded on average 77.3% uptake. This clearly shows that the Luxury Real Estate is working, supported by the following factors;
The Growth of High Net Worth Individuals - The number of high net worth individuals in Kenyan grew by 93.0% between 2006 from 4,900 to 9,400 in 2016, and is projected to grow by 80.0% over the next 10 years to 16,900 in 2026 supported by entrepreneurial growth, and increased number of senior-level employment in large and growing corporates. This has therefore led to increased disposable income and more people can afford real estate products, as per their preference and tastes, which tends to a sophisticated lifestyle. More so High Net Worth individuals, invest 25% of their wealth into real estate, according to Knight Frank Wealth report 2017, hence translating to increased demand.
Presence of Multinational Firms - The presence of multinational firms such as Google, General Electric, and Hewlett Packard, as well as the entry of firms such as Wrigley’s and Volkswagen, has created demand for up-market housing and offices from expatriates.
Higher Returns – Luxury Real Estate generally offer higher returns compared to other developments. For example, Luxury apartments have higher rental yields at 8.1% compared to the market average at 5.6%, while Grade A offices have higher rental yields of 10.2% compared to Grade B and C at 9.2% and 8.6% respectively, and Destination malls such as Two Rivers Mall, also deliver 13.5% points yield higher than the retail market average of 9.6% in Nairobi, mainly attributed to higher rents per square metre charged due to prime locations and facilities provided.
In conclusion, the trend on Luxury Real Estate is taking shape and attracting interest from both investors and homeowners, as they leverage on high returns and fulfillment of their lifestyles. Developers should, therefore, consider providing the “Extra” factor in all the developments to appeal to the target clients.