Luxury real estate, a real estate apart?

Although it is an exceptional sector, luxury real estate is a great place to observe what is best on the market and in customer relationships. Discover this exclusive file signed Fabrice Larceneux and Hervé Parent.

Is luxury real estate an oxymoron?

From the outset, we tend to think that housing corresponds to a primary need, to a fundamental need for each of us to live, when luxury refers to the superfluous, the futile or even the useless. However, there is indeed a market for luxury goods, exceptional accommodations that are obviously intended to be housed but even more so, to paraphrase Gaston Bachelard, to dream. It is the world of the imaginary and the inaccessible that we want to approach. Luxury real estate embodies the double need to meet vital needs and to awaken the desire to re-enchant one's world. Knowing more about luxury real estate means understanding what is best in real estate and in supporting demanding customers.

The blurred boundaries of luxury real estate

The first surprising observation is that there is no single and shared definition of what a luxury property is. The first criterion is obviously the price, more precisely the million euro threshold that international reports mention as entry into the world of luxury. In reality, properties and locations are very heterogeneous and the million criterion is insufficient. In Paris, a 3/4 room apartment of 100m2 can easily reach this sum without being considered a luxury property. Finer approaches are being developed, in particular by networks of specialized agencies: it is sometimes considered that luxury starts at 1.4 times the average price in an area, and ultra-luxury at 2 times the average price. The terms “high-end” and luxury are sometimes used and cover the same sizes.

In concrete terms, this means that if the average price is 10,000 euros per m2, a luxury property will start at 14,000 euros and an ultra-luxury property at 20,000 euros per m2. Other approaches instead consider the 10% of the most expensive goods. They are therefore expensive goods both in absolute value and in relative value in relation to a space that is not always easy to demarcate. Les Parcs de St Tropez is a well-defined micro-market, specific to ultra-luxury. In this fenced and secure area of 110 hectares, with 180 co-owners, the first house without a sea view starts at 8 million. But luxury real estate is not limited to celebrity villas or exceptional locations. You should be wary of these properties that bias perceptions and give a false idea of the real market.

Internationally, it is often considered that a luxury property is “only” sold 3.5 times more expensive than a standard property, but with an entry price that clearly differs depending on the location in question. In Monaco, for example, a luxury property will start at 10 million dollars when this threshold will be 2 million in Paris and 750,000 euros in Ottawa. Various studies agree that a luxury property is valued internationally on average at nearly 4 million euros (45% of properties between 1 and 2 million) with an average surface area of 340m2.

More specifically, a specific analysis of the Belles Demeures site shows that in France, properties worth more than 5 million euros account for 10% of ads (3% of more than 10 million), while the segment of properties under 2.5 million represents nearly 75% of ads. In reality on the ground, luxury often covers goods whose price is between 1 and 2.5 million euros. And real estate agents do not hesitate to publish luxury properties under a million in a medium specialized in luxury: this is even the case for 35% of ads!

A second observation shows that luxury real estate is not really the castles and mansions that one could imagine. Indeed, most of the market consists of apartments (35%) and houses (55%). Other types of property, chalets (2%), castles (7%) and mansions (1%) remain exceptions.

Estimating the price of a property is not easy. Online estimates are often irrelevant because transactions are too rare and goods are too specific. More qualitative characteristics are then taken into account. It could be the exceptional view from the terrace, the size of the boat garage, or the presence of a helipad in the garden. But the analysis is often more basic and it is the criterion of rarity and relative uniqueness that is intuitively taken into account. An apartment in La Baule with a sea view will not necessarily be considered as luxury accommodation because many apartments benefit from it. On the other hand, on this Breton coast, a house with a sea view, more rare and exclusive, will be well considered as luxury.

The assessment of experts is therefore particularly delicate and based on experience. Thus, a property is more likely to be considered luxury, or even ultra-luxury, if it succeeds in combining several requirements: the objective qualities of the location and the building that make it a unique and sought-after property, but also the feeling of rarity and prestige that values the social success of the purchaser and the ostentatious dimension that impresses friends.

One of the specific characteristics of luxury real estate is also “privacy”: it is a form of confidentiality that guarantees both the security of private space without vis-à-vis and the protection of a highly sought-after social environment, especially with neighbors who share the same values. There would thus be 1,500 roads, passages, cities and private hamlets in Paris, such as Villa Montmorency, a symbol of the community where business leaders and celebrities live side by side.

The difficulty of providing a clear definition of luxury goods is also explained by the intangible elements that characterize them, for example, a history of the place or the famous former owners. Living in Edith Piaf's former apartment would make many American billionaires dream. And it is perhaps in this heritage, in this art of living that lies part of the French Touch that attracts foreigners to France so much. A scientific study shows that international buyers buy properties in the most attractive locations in Paris, effectively ousting historical residents. Interesting results: these non-resident owners largely overpay for their goods and make lower profits on resale. Finally, these acquisitions by non-residents explain part of the rise in luxury goods prices.

And, once they own a Parisian home, foreigners have a hard time getting rid of it: Americans don't imagine selling their Parisian home, for which they have a strong emotional attachment, explains the President of a large Parisian agency. In fact, retention rates are very high for second homes in France, on average 8 years. Foreigners would therefore buy more than they sell in France.

1 Cvijanovic, D., & Spaenjers, C. (2015). Real estate as a luxury good: Non-resident demand and property prices in Paris. HEC Paris Research Paper No. End-2015-1073.

Who are the luxury buyers?

Are Gulf buyers or Russians spectacular exceptions or an important part of the market? It seems that our perceptions are biased and that the reality is much less exotic. An index can be given by analyzing visitors to the Belles Demeures site (2.7 million unique visitors per month). Foreigners made only 20% of visits in January 2022. And many are residents who already live in France, for example in the Parisian real estate market where 85% of foreign buyers are residents. As an indication, Internet users who arrive first in January 2021 on the Belles Demeures site come from Belgium at 19%, from the United Kingdom at 12%, from Switzerland at 11%, from the United States at 10%, from the United States at 10% and from Germany at 8% from Germany. But the current crisis context is particular. One thing we know for sure is that the luxury buyer is rich. The Anglo-Saxons call them HNWI (High Net Worth Individuals), i.e. individuals whose wealth is greater than 1 million excluding their main residence. It is estimated that between 30 and 50 million households can afford a property to more than one million. But there are richer ones: the Ultra HNWIs. Only 2,755 of these billionaires would share 13 trillion dollars in 2021. A huge potential market for luxury real estate that remains international and regularly growing.

However, high incomes are not the best predictor of the purchase of a luxury property. Academic studies show that the probability of buying a luxury property is explained more by the value of the property previously owned than by income, which means that it is more interesting to prospect current owners than the rich regardless of status. International analyses usually identify two main categories of buyers. On the one hand, aged between 58 and 76, the billionaire boomers number more than 1,000 and are the driving force of ultra-luxury with a cumulative fortune of 4 trillion dollars. They can easily sell a large property for 6 million to buy two 3 million second homes in two different places around the world. These purchases thus support their lifestyle on a global playground.

On the other hand, millennial billionaires are fewer in number, around a hundred, but from an ultra-connected generation. Attracted by ultra-advanced home automation, they also have high expectations in terms of sport and health that gyms, yoga or relaxation rooms must meet. They are easily adept at nomadism, experiences and the sharing economy (Airbnb, Le Collectionist, etc.) but above all they seek to make their acquisitions profitable. For example, they buy turnkey second homes on the French Riviera, close to the city center and attractions, villas that will be rented when they are away. In fact, maintaining a property can be very expensive, up to 1.5% of the purchase price. It is therefore not uncommon for these annual fees to exceed 100,000 euros, including the salaries of the guards. An integrated rental service is then offered directly during the acquisition of the property, and the agency takes care of everything while the owners are away. These buyers are often multi-owners, from the apartment in Manhattan to the pied-a-terre in London, including the chalet in Switzerland and the villa in France.

A psychological trait that characterizes them is the fear of missing out on an opportunity: the famous FOMO (fear of missing out), a phenomenon that has accelerated with the rise of social networks. It is embodied in the desire to be able to seize opportunities in fast-paced markets. This psychological mechanism has a tendency to push prices up. When the market increases by 5%, luxury increases by 7 to 15%, analyzes Hugo Baillet of Coldwell Banker. During a downturn, luxury real estate remains the other way around
a safe haven, as many owners have the possibility of delaying their sale, thus contributing to the scarcity of goods and the maintenance of prices.

The succession of crises, financial, health, ecological or geopolitical, is accelerating the trends that millennials had initiated, valuing the properties that best adapt to the new requirements of buyers: properties that allow you to rest with a privatized green space and a breathtaking view out of sight, to work in a space where connectivity is perfect and secure, to work in a space where connectivity is perfect and secure, to play sports in a state-of-the-art room or to relax in the room dedicated to the home cinema, etc. In short, characteristics that enable a lifestyle all-in-one in a property where everything is under control. With the uncertain future of the world, buying a luxury property is in their eyes an economic as well as emotional and symbolic safe haven value.

A luxury real estate brand

Like major luxury brands, luxury networks often start with the founder's story. It is a market driven more by the personality of the advisor than by the property itself. The relational is essential to the transactional. The name of charismatic leaders is becoming a locally powerful brand that often benefits from being linked to international networks. Combining the auction of an art object or a painting intended for a global clientele with the sale of a luxury villa is relevant, especially for certain brands whose reputation is more local. Combining local expertise with an international network is therefore absolutely essential.

Thus, the luxury real estate brand is found not only in the quality and the price of the properties sold, but also and above all in the quality of the service provided. The job does not only consist in the simple presentation of expensive goods. It is a whole philosophy oriented towards personalized and very qualitative customer support: it is therefore less a cost logic than the search for excellence and total availability that guides the entire commercial approach.

A first focus concerns matching and the ability to be very effective in relation to the demand of buyers: the expertise displayed is materialized in the ability to show few, but highly qualified properties. These properties correspond to real alternatives and not to options to enhance, by contrast, a property that one wishes to value. Professionals consider that 7 visits is a maximum. Supporting the buyer also means a regular presence throughout the process. “Even if nothing happens, we call them” indicates an agent in charge of a premium clientele. A battery of KPI's (click rate, conversion rate, evolution of offers, etc.) is regularly analyzed to feed the reflection on the marketing strategy of the property and the commercial arguments.

And even, “it is once the offer is accepted that the work begins” underlines a professional, especially in terms of financial support and tax advice on the most suitable legal structure that will carry the property (SCI, holding). For reasons of confidentiality, it is not uncommon for the buyer not to be mentioned in his own name. But services can also go beyond the transaction: turnkey services are sometimes similar to luxury concierge services (limousine reception, EDF & telephone contract management, moving works of art, etc.). The service provided by third parties must be impeccable because a possible problem would have the disadvantage of affecting the reputation of the real estate advisor. By recommending services, he engages his responsibility. This support is very difficult to offer and the risk must be assumed. These personalized services are also available for the seller. Real branding of the property is carried out: high-quality videos and photos, international media, content and staging of the living experience that the property allows, etc. The aim is to go beyond functional elements and technical characteristics to enhance the property. The objective is to address emotions to promote projection into a lifestyle that will make the buyer dream. Photos and short films are also preferred media that are often offered to customers who want to keep track of this moment. The announcement is generally broadcast on major portals and online networks at the international level. However, in certain areas very popular with famous people, the off market would be significant and could even reach 60% of total offers. The work is then done discreetly via the network of agents and their address book.

In the world of luxury, the main objective of supporting a customer is to ensure that there will be no unfortunate incident. The main challenge is that everything goes well, without unpleasant surprises. Every effort is made to prevent problems because hiccups are not forgiven. It is not a question of forgetting the key or of not knowing perfectly the property, its context, its history. Adapting to a luxury clientele requires not only skills and know-how, but even more so, interpersonal skills. This keen knowledge of habits and expectations, this ability to share the same interests and the same desires, to frequent the same places, is a differentiating element from traditional real estate. Whether employed or self-employed, real estate consultants must behave perfectly with prestigious clients, know how to reassure them at all stages and exceed their expectations by using the same level of treatment they receive when they enter their golf club or go down to a palace.

Thus, advisors are rarely young recruits but much more seasoned, multilingual men and women, rich in international experiences who allow them to master all the implicit codes of this universe and avoid mistakes. The quality of personality and relationship is decisive. The issue of new technologies has also marked the luxury real estate sector. While digital technology has made it possible to move upmarket by offering a range of tools adapted to remote viewing, it has also facilitated access to younger customers who rarely cross the doors of a physical agency. Today all digital channels are used (virtual visit on request, YouTube channel, virtual meeting room with exchange of documents between the agent and decision-makers) mobilizing advanced technologies such as high quality 3D videos. The ultimate objective is that the physical appointment only takes place in an agency if it is really necessary. A major luxury brand tells us that for 2,400 requests for information per month, only 100 come from visits to branches. It has even happened that some buyers ask for an online option — a one-time rental that they confirm with purchase once there.

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The specificities of luxury agencies as seen by a software publisher

Agencies that succeed in this demanding segment have an effective marketing approach, they have specific technical demands that make digital tools evolve upward, in particular their CRM software. Some pioneers are already using Data Predicting. The key point is the ability of the software to enable a high level customer relationship: contact, follow-up, reminder after reminder. The connections between the software and the email sending tools must make it possible to keep the database alive. Software now commonly offers a seller extranet that allows owners to follow all stages of the sale.

In luxury, a buyer extranet makes it possible to better support the client's search, as would a real estate hunter. The objective is ambitious: joining a luxury agency should be like joining Hermès, the client is taken care of from the beginning with very personalized support throughout their career. The technical highlights are the possibility of working in the language of customers, the facilitation of relationships between agencies, the gateways to specialized advertising sites. For languages, English is a must, but it is also necessary to offer Italian, German and Scandinavian languages, Dutch... Relationships between agencies, within a network or between freelancers, are based on a peer-to-peer logic, more so than in an MLS-type organization. Agencies must be able, through their software, to share property or customer records. The gateways to network sites and specialized international sites such as Luxury Portfolio, LeadingRE, Luxury Estate, are imperatives for the distribution of properties, but also to legitimize the presence of the agency in luxury. The import of leads from these portals should make it possible to automate their processing and the analysis of the performance of the portals. For the presentation of properties, more than virtual visits, luxury prefers photo reports made by professionals and accompanied remote visits.

Summary article of the interview with Nicolas Guillaud, president of Apimo, publisher of software solutions and websites dedicated to real estate.

The article above (modified) comes from Figaro Immobilier, published on 22/06/2022. copyright Le Figaro.