This year “affordable” is all the rave in the property sector and rightly so. In a well written report, Khazanah pointed out that houses are severely unaffordable now. There is pent-up demand for affordable housing, which, means that there is a healthy market for it. It is estimated that the vacancy rate for residential condominiums in the Klang Valley is about 30%. In KLCC it could be as high 40%. Affordable housing with asking rentals below RM1,800 on the other hand have very low vacancy rates. With declining transactions, high vacancy rates, and generally lower yields, luxury properties do not seem like an attractive investment. It begs the question, “why should you invest in luxury property?”
WHAT IS LUXURY IN TODAY’S MARKET?
First, it would be prudent to explore what constitutes luxury in the property market today.
For a property to be considered luxury, it should meet exceptional standards in design, quality, and facilities. This is usually typified by Avant-garde concepts, “5-star hotel type” lobbies (for condominiums), smart technology, above average security and highstandards of maintenance.
Luxury properties are usually low density and situated in exclusive locations. It could be in the city center, in a gated forest sanctuary or next to an exclusive golf course.
Finally, a luxury property carries a premium price tag.
One of the greatest draws for luxury properties is the emotional appeal. It is a natural aspiration for most people to move up the social ladder. Wealth is closely tied to this upward progression and owning a luxury property features prominently as status symbol.
Beyond this, luxury properties appeal to the limbic brain in so many ways that it becomes difficult to rationalize its purchase and easy to succumb to basal desires.
I had a RM20 million home for sale last year. It featured a 2,500 sq ft entertainment deck on the top floor with a 67 ft swimming pool from which you could see the Twin Towers. This entertainment deck came equipped with Bang & Olufsen speakers. The moment potential buyers stepped out of the Niche home elevator into the entertainment deck, I would see the emotional attraction.
The house had offers almost immediately and sold within 3 months.
In his brilliant book, Landing Page Optimization, Tim Ash writes about the limbic system of the brain. It is divided into 3 distinct layers (Paul Maclean’s triune brain theory);
- The reptilian brain – This is first part of the evolution of our modern brain. It controls basal instincts like sex, social dominance, and fight-orflight responses.
- The limbic system – This part of the brain dominates “emotion, attention, and affective memories” (memories that have strong emotional charge).
- The neocortex – This layer controls the higher functions. In Maclean’s words, the neocortex is the “mother of invention and father of abstract thought.”
According to Ash, the limbic system often dominates higher mental functions. Products must please the limbic system of buyers because they are judged on the “emotional gut reactions” that they evoke.
It is the limbic brain that actually determines most of our purchase decisions. The neocortex helps us make post logical rationalization as to why the purchase was made.
The effect of luxury properties on the limbic brain is undeniably strong. For this reason, investment into luxury properties will always be appealing.
APPEALING LONG-TERM CAPITAL APPRECIATION
In general, the yield for luxury properties is not as attractive as affordable properties. Luxury properties also have higher vacancy rates. Although there are exceptions to this generalization, on the outset it would appear that investors should only focus on affordable and low-cost homes.
There is another facet though; long-term capital appreciation. The biggest gain in property investment is usually from capital appreciation. Luxury properties have potentially better long-term capital appreciation prospects because they last longer. This is especially pronounced in the high-rise segment. Maintenance on luxury properties is much better and their high-value designs remain in vogue for long periods.
So a high-rise residential development in KLCC like Marc Residence for example, can look new even after 8 years whereas a medium-cost high rise could be run-down after 5 years.
What this means is that the appreciation in luxury properties is unlikely to plateau in the long term.
Another plus is the fact that buyers in this segment can afford to pay a premium for perceived value. This can result in significant capital gains. In the affordable segment, buyers are generally dependent on high loan-to-value ratios. So anything more than a 10% down payment may be prohibitive.
SO, ARE LUXURY PROPERTIES BETTER INVESTMENTS?
Not necessarily. Luxury properties have longer turnover times because tenants and buyers in this segment are sparse.
However, for the homebuyer that can afford it, owning a luxury property offers very strong emotional gratification. This usually trumps logical thinking. The potential for better long-term capital gain is also good in this segment.
Therefore investors with long-term outlooks may find the investment in luxury properties worth the money.