L.A.’s Trophy Homes Starring in Sequel for Luxury Market

Bloomberg

The Reserve is a six-bedroom, 11-bath Art Deco mansion in Los Angeles that Kristoffer Winters spent more than two years rebuilding and decorating down to its monogrammed bathroom towels. His asking price was $25 million.

“The gentleman that bought it got it completely furnished,” Winters said during an interview at the Holmby Hills estate, a six-minute walk from the Playboy Mansion. “The day we close escrow, he can actually throw a dinner party.” Their deal is scheduled to close today.

Speculative building and flipping of homes with $20 million-plus price tags are rebounding in the toniest areas of Los Angeles as buyers, many from overseas, are drawn to the land of swimming pools and movie stars. Sales stalled after the 2008 real estate crash when demand and financing dried up. A stronger economy and scarce listings are driving prices skyward again.

“One percent of the one percent are overly rich and they go to only a few cities in the world,” said Alessandro Cajrati Crivelli, chief executive officer of Est4te Four Capital, a developer of fashion and design showrooms in London, New York and Los Angeles who is building five spec homes as large as 20,000 square feet (1,858 square meters) in Holmby Hills and nearby Bel Air. “London is No. 1 in the world and New York is No. 2. And the only other American city that I think can attract the international set is Los Angeles.”

Global Currency

The revival of luxury spec homes illustrates a growing divide in the global housing market, where cash-rich investors have the edge over people who need a mortgage in every segment of the market. Winters, who previously partnered on two dozen smaller projects with actor Jeremy Renner, sold the Reserve to a man from London, whom he declined to name.

“Luxury real estate is the new global currency,” Jonathan Miller, president of New York-based appraiser Miller Samuel Inc. said in a telephone interview. “They’re building the world’s most expensive safety deposit boxes.”

More than half of housing purchases since 2012 were financed with cash compared to 10 percent in 2005, when mortgage lending standards were less tight, Goldman Sachs Group Inc. economists Hui Shan, Marty Young and Charles Himmelbergwrote in an Aug. 14 report.

“Before the crisis, for each dollar of home sales transaction, 67 cents were taken out to finance the transaction,” the report said. “Currently, only 44 cents are being borrowed to finance each dollar transaction.”

‘Tiny Share’

U.S. all-cash sales accounted for 31 percent of transactions in June, up from 29 percent a year earlier, as median prices climbed 13.5 percent from a year earlier to $214,200, according to the National Association of Realtors. The U.S. homeownership rate maintained an 18-year low of 65 percent for the quarter ending June 30, according to Census Bureau data.

Sales of U.S. homes for more than $1 million jumped 25 percent from a year earlier while sales for less than $100,000 fell 19.6 percent, the real estate trade group reported.

Trophy homes are “still a tiny share of the market,” said Stephen Melman, an economist for theNational Association of Home Builders. “We’re more worried about the fact that first-time homebuyers can’t qualify for a mortgage. That’s one of the reasons the markets are recovering so slowly.”

Ultimate Homes, a guide to the most expensive U.S. houses, listed 270 residences with asking prices at $20 million or more in its annual edition published in May, a month when the National Association of Realtors reported 2.15 million homes were on the market.

Ready Market

While many high-cost homes take months or years to sell, sometimes because they’re listed for unrealistic asking prices, there’s a shortage of new mansions in Los Angeles because builders haven’t added inventory for years, according to Joyce Rey, executive director with Coldwell Banker Previews International in Beverly Hills. Buyers with cash want new homes in move-in condition and don’t have time to supervise construction themselves, she said, providing a ready market for spec houses.

Rey, who sold $200 million in homes last year, was a listing agent for Le Palais-The Crescent Palace, a 48,000-square-foot (4,460-square-meter) Beverly Hills spec house. It sold in June for $32.75 million, according to Redfin Corp.

“We need more of them,” Rey said in a telephone interview. “We have very strong demand for the product once it’s ready.”

American Bargains

While London has reigned as the top market for international mansion investors, money is moving to the United States because property is still relatively cheap by global standards, according to Miller. London luxury homes sold for $3,890 to $4,300 a square foot ($41,900 to $46,300 a square meter) in the fourth quarter of last year compared with $2,030 to $2,240 in New York and $1,210 to $1,340 in Los Angeles, according to a March report by Knight Frank LLP, a London-based real estate services firm.

The three most popular U.S. Zip codes searched by overseas buyers over the last year were all in the Los Angeles area: Holmby Hills and Bel Air’s 90077, Beverly Hills’ 90210 and West Hollywood’s 90069, online real estate information service Trulia Inc. (TRLA) reported in April. Miami’s 33131 and downtown Manhattan’s 10013 ranked fourth and fifth.

Median resale home prices set records in the most recent quarter at $4 million in 90210, $2.58 million in 90077 and $2.53 million in 90069, according to research firm DataQuick Information Systems Inc. Only 275 new houses sold in the three postal districts since 2002, compared with almost 13,000 total sales, according to the San Diego-based company.

The median price of a home in Los Angeles jumped 26.1 percent in July from a year earlier to $421,350, the California Association of Realtors reported today.

Greenwich Inventory

Spec home building has a long way to recover in much of the country. There was a 3.9-monthsupply of unsold new homes on the market in June, the lowest inventory since 2004, according to the Commerce Department.

In Greenwich, Connecticut, home to many of the financial world’s elite bankers and money managers, the high-end market is still working through spec inventory built before the 2008 financial crisis, according to Miller. In the Hamptons on Long Island, the summer haven for rich New Yorkers, spec builders are targeting homes for $15 million or less, down from peak target prices above $20 million, according to Joseph Farrell, owner of Farrell Building Co. in Bridgehampton, New York.

“I need closings,” Farrell said. “I can’t wait for $18 million closings.” He’s preparing 20 spec homes in the Hamptons for 2014, about the same as last year, which was his busiest since the housing bubble popped in 2008.

Home Collectors

Miami Beach, Florida, is another city where a spec home recovery is underway, driven by buyers from New York, Latin America or Europe shopping for a third or fourth mansion, according to Oren Alexander, a broker with Douglas Elliman Real Estate. He set a local record with a $47 million spec home sale last year.

“Some people collect cars, some collect watches and some collect girlfriends,” said Alexander, whose father built the waterfront spec home purchased by a “Russian friend.” “The people that are buying these homes don’t look at it on the cost basis of how much it is to spend two weeks a year in Miami. It’s more about having a trophy property.”

Trophy homes can be risky investments because they’re not liquid and they come with high carrying costs, such as taxes, maintenance and security, according to Kacy Gott, a San Francisco-based director at Aspiriant, a wealth-management firm.

“There are so many headaches, we don’t see a lot of upside to it,” he said.

While jumbo mortgage financing is available for high net worth investors with U.S. residency status, it’s difficult for foreign visitors to get a loan through U.S. banks, said Louise Gunderson, managing director of wealth management at UBS AG (UBS) in New York.

Flipper Financing

“A lot of times you will see that the international buyer will pay cash,” said Gunderson, whose clients have an average net worth of $2 million to $25 million.

Financing for spec builders and flippers of multi-million dollar Los Angeles homes is starting to become available as boutique lenders gain confidence in the market. Arixa Capital Advisors LLC lends to investors for acquisition and renovation of homes selling for as much as $6 million, according to Jan Brzeski, founder of the Los Angeles-based fund. The loans are typically for one year at 9.9 percent interest rates and limited to 75 percent of the project’s cost, he said.

“There’s a deep pool of buyers for a $6 million house,” Brzeski said. “Above $6 million is a more rarefied market, where we don’t feel completely comfortable yet.”

Celebrity Connections

New homes in such Los Angeles-area communities as West Hollywood, Beverly Hills, Bel Air or Holmby Hills sell for more than $2,000 a square foot, according to Stacy Gottula, an agent with Coldwell Banker Previews in Beverly Hills.

“Developers have scooped up a lot of land where they’re going to build spec homes, especially in the hills,” said Gottula, who has closed three homes for more than $25 million this year. “The demand right now is for high-end contemporary view homes.”

Los Angeles attracts international home buyers because of its balmy climate, Hollywood glamour and the variety of landscapes from the Malibu beachfront, to the leafy estates of Beverly Hills to the hillside perches above the lights of West Hollywood, according to Mauricio Umansky, whose listings include three spec homes with asking prices above $20 million.

Celebrity connections also help drive international sales, said Umansky, who appears on “The Real Housewives of Beverly Hills,” a series broadcast by Comcast Corp. (CMCSA)’s Bravo cable network, where his wife Kyle Richards is a cast member.

“I get e-mails from people in Russia and Korea and Australia who saw the show who want to see my houses,” Umansky, CEO of the Agency, a Beverly Hills-based firm he co-founded in 2011. “We’ve taken advantage of the notoriety.”

Eleven Fountains

Winters, 39, developed the Reserve after working on smaller projects with Renner, who starred in “The Hurt Locker” and “The Bourne Legacy.” Those homes, which sold for $4 million to $6 million, each took almost as many phone calls and workers as the Reserve, which is why he decided to go big, he said.

Winters razed everything but two chimneys from an older house on the Reserve’s two-acre (8,000-square-meter) lot off Sunset Boulevard, which allowed him to speed up permitting because it was technically a renovation and lowered the property taxes compared with a new build, he said. He doubled the floor area to 10,005 square feet, boosted the ceilings to as much as 18 feet, added 11 indoor and outdoor fountains and a 12-seat screening room outfitted with lighting fixtures salvaged from 1920s movie theaters.

“Jeremy and I did very well, even during the tough times,” he said. “Right now you’re seeing a lot of luxury homes that are coming online by spec builders who saw the market getting hot a year ago. Three years ago, you couldn’t find anybody.”

To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net

To contact the editor responsible for this story: Rob Urban at robprag@bloomberg.net