An Investigation on the Potential Expansion of Barnes Realty into Emerging Markets of the Luxury Real Estate Industry

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Executive Summary

The main aim of this research is to investigate on the potential expansion of Barnes Realty into emerging markets of the luxury real estate industry. The main focus on emerging market is because of the vast opportunity since developed economies seems to deteriorate. The theoretical perspective utilized in the research is on internationalization theory, specifically the eclectic paradigm and transactional costs. The rationale for this study is to examine the strategies that realty companies use in the real estate luxury market, and this will in turn help Barnes Realty to come up with a template for their organizational success.  Additionally, the main aim of the research is to examine the strategies that Barnes Realty can use so as to be successful in the luxury real estate in emerging economies. The data collection used to facilitate the research is both quantitative and qualitative data collection technique. The quantitative methods of data analysis that will be used includes questionnaires, designed interviews, and structured interviews. The quantitative data will equip the company with data specifics that will include the growth rate of the luxury real estate industry and the projected future growth rates. Finally, the paper will draw conclusions as well as give managerial implications and application and possible recommendations.

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INTRODUCTION

Recently, numerous real estate firms are shifting their focus to the world’s emerging economies as a manner of accruing maximum returns.  Investing in emerging markets have its own risks such as enhanced political interference, un-matching real estate regulatory framework, and the fluctuation of foreign currency. Successful expansion of a real estate into emerging markets requires a clear strategic planning. Therefore, this paper will be aimed to investigate the potential expansion of Barnes Realty into emerging markets of the luxury real estate industry. Definition of luxury real estate market is complex especially because the value differ across the globe.  But what these different definition ultimately share, is reflected by the criteria any luxury property has in common. An outstanding location is the top-criteria for luxurious housing, closely followed by the hedonistic experience to property offers, as well as ultimate privacy, the opportunity to have every detail personalized and the possibility to move in just the other day. (Christie’s international real estate, 2015) However, the luxury real estate market in the emerging markets is becoming lucrative since real estate in cities of developed countries such as London, New York, and Hong Kong is reported to have plateaued in late 2015 and 2016. Thus, it becomes imperative and prudent for luxury real estate firms to consider expansion to emerging market such as Brazil, Singapore, and some parts of Africa such as Durban. For instance, Christie’s international real estate (2015) suggest that “the average starting price for a luxury property worldwide is $2.2 million.” Defining ‘luxury real estate’ from pricing perspective is difficult because there is constant shift to exchange-rate movements across the globe.

The preferences and the choices of wealthy people are constantly changing due to the new technologies being used in building construction to embellish the available architectural designs (Angotti & Marcuse, 2011). The luxury real estate markets are expanding from the traditional destinations that include London and New York City to new destinations that mostly include cities in emerging markets. The objective of this analysis is examining the possibilities that exist as Barnes International attempts to expand its market share to ensure that they tap into emerging markets (Wade, 2014). In order to achieve this objective, the research will seek to elucidate on the fluidity in luxury real estate and to identify the competitive that Barnes International can usurp with a view of edging out its competitors.

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THEORETICAL PERSPECTIVE

The research will apply the theories of internationalization, and the main theory that will be applied is the eclectic paradigm and transaction cost analysis.  The eclectic paradigm and transactional cost analysis theory was developed by Dunning (1988), which mainly focuses on “the propensity to internalize the cross-border markets.” Therefore, the theory is very significant to the aim of the study since Barnes Realty has to make rational decisions in its quest of venturing in luxury real estate marketplace of emerging economies. The major assumption of transactional cost analysis (TCA) is that markets are competitive.

Rationale for the Research

The rationale of the research is examining successful realty companies that are in the luxury real estate market to establish the reasons for their success in a highly volatile market. The success of these companies will, in turn, enable Barnes Realty to come up with a template for their organizational success (Camerer et al. 2011). Additionally, the information gathered from this research will ensure that Barnes Realty can formulate a business strategy that will ensure their success in emerging markets. Since Barnes realty is already in operation in few select destinations, these strategies will enable them to expand to other identified luxury destinations.

Aim of the Research

The key strategy for the research is to examining the recorded successful cases in the expansion of international real estate companies. By examining the proven successes, the research will integrate the reasons for their success and the areas where they have faced challenges (Cook, 2010). The comprehensive and extensive analysis will ensure that Barnes realty can implement strategies that have a high likelihood of being successful. The research analysis will examine the recorded instances of successful penetrations in the emerging markets. In this regard, the research paper will ensure that it can analyze the decisive factors in the expansion of Barnes realty in the luxury real estate industry.

  • How can Barnes International Realty expand their business by opening up to emergent destinations of the luxury real estate market?
  • The number of successful companies engaged from the luxury real estate marketplace.
  • Factors contributing to success of the luxury real estate companies.
  • The factors that are responsible for the success of these companies in emerging markets
  • The potential risks of establishing a company in emerging markets (Hui et al. 2010).
  • The most appropriate strategy that can be formulated by the management of the company to ensure that overall success is guaranteed.

Data Collection Approach

In fulfilling the first aim of  the research, which is the manner that Barnes International Realty expand their business by opening emergent destination of the luxury real estate market, data such as ranking of the luxury real estate markets in emerging economies were collected.  Data from various emergent economies relating to real estate industry were collected to ascertain thee attractiveness on the industries in this economies. There was also a comparison between data from developed economies such as real estate in cities like New York, London, and Hong Kong.  Consequently, data will be collected on the manner that successful companies engaged from the luxury real estate marketplace, therefore data related to Christie’s international real estate will be compared to assess how Barnes Realty can be successful. Data related to the contributing factors that can enable a company like Barnes Realty to be successful in luxury real estate will also be collected. Data on the factors that lead to successful investment in emerging economies will also be collected to ascertain the techniques that Barnes Realty can adopt to positively enhance its business quest in these economies. Additionally, data on the potential risks that are associated in investing and establishing a real estate company in emerging markets will also be assessed. Finally, both qualitative and quantitative data on the most suitable strategy that a company’s leadership can adopt to ensure that it is successful will be collected. Therefore, data collection approach for this research will be a mixed research design, since data collection will utilize both quantitative and qualitative data. Collection of both qualitative and quantitative data will be very vital to ensure that Barnes Realty makes the most informed decision on how to venture in luxury real estate market in emerging economies. Collected data will be analysed in a systematic process (Maylor & Blackmon, 2005) to ensure the identification of important findings, review and conclusion, as well as a recommended expansion plan for Barnes Realty. To achieve a clear and neat work, collected data will be organised in different tables that link back to the research question in order to examine whether the gathered information represents a relevant answer.

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DATA PRESENTATION, DATA ANALYSIS AND RESEARCH FINDINGS

Introduction

Barnes International Realty serves the high-net-worth clients in the acquisition and sale of exquisite assets in real estate. For Barnes International Realty, the world of luxury properties begin at the mark of $1 million price. This is despite the variations in the benchmark price for the luxury assets in the top cities in the world. For instance, the luxury price mark for luxury real estate assets in London begin at $7.8 in London, and $1 million in Cape Town, South Africa. For purposes of this Independent Research Study (IRS) aimed at investigating the potential expansion of Barnes Realty into emerging markets of the luxury real estate industry, three important global markets will be analyzed; namely for New Zealand, Singapore and Hong Kong for attractiveness of potential expansion. The rationale for the selection of these countries is based on the fact that these countries are emerging markets with the greatest potential for Barnes and have the potential of giving Barnes a strong market share in the luxury real estate market (Christies International Real Estate, 2016).

Current Clientele of Luxury Real Estate Assets

New Zealand has experienced a robust growth in the luxury real estate for properties exceeding the $1 million mark. This growth is attributed to the explosion in affluent migration where wealthy individual have settled in the country for purposes of wealth creation especially in Auckland. Moreover, the coastal communities in the country are also experiencing a robust growth in the high end property market. Many city dwellers are also settling in the North Island north-eastern coastline after relocating from Auckland. As such, even the remote areas in the country are experiencing an increase in the million dollar plus sales in residential properties. The instituted legislative changes in the country have played a great role in encouraging an influx of overseas funds for housing. This analysis reveals that, New Zealand is not building enough houses for the incoming traffic in Auckland and other areas in New Zealand, hence opening an opportunity for new entrants into the market.

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Hong Kong residents have grown keen of the luxury residential properties, especially due to the strong appeal of the industry by international clientele (Sotheby’s International Realty, 2016). This is one of the key global markets in the luxury real estate markets. Hong Kong is home to many superrich individual who are drawn into multi-million homes in Long Angeles, San Francisco, London or Vancouver. These multimillion-dollar potential home owners have accelerated the recovery of the luxury real estate market in Hong Kong.

Just like New Zealand and Hong Kong, Singapore’s luxury real estate seems to attract foreigners the most. According to the Pacific Exchange Rate Service, Singapore occupied the sixth position of countries with the highest percentage of foreigner’s worldwide. The increase in foreign demand for high end properties have sparked a high gap in the market for new entrants into the industry.

The changes in the demography of these countries has been attributed to the rise in demand for luxury real estate properties.

Trends Prices of Luxury Properties

In New Zealand, the price of luxury properties continue to rise, albeit at a slower rate. However, following the devastating earthquake with a magnitude of 7.8 that resulted in massive destruction of property, the demand for houses has been high the last few months and is expected to continue to surge in the subsequent months. The luxury housing market is expected to be bolstered by the post-earthquake building, due to the nationwide increase in the price of housing by 6.26% by the third quarter of 2016 and by 3% in the last quarter. Auckland reported the greatest increase in the prices of luxury properties with construction of the most expensive houses with a spectacular housing price of about 114% since 2012.

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Hong Kong experienced a decline in general price index of the residential properties in 2016, a fall from the prior annual increase of 19.61% in 2015. However, the smaller properties in the middle income level were the most hit but the fall in prices, a trend that was not experienced in the properties that are bigger in size of high end. According to Colliers International, the Ultra-luxury properties were not affected by the current downward trend in the Hong Kong housing industry. In the first quester of 2016, the price of trophy properties experienced a robust growth rate, approaching record levels.

In Singapore, the prices of prime and luxurious properties continue to decline since the peak in 2011. The government of Singapore has put in place deliberate measures to ensure curb the escalating property prices. As such, Singapore offers a great opportunity for ultra-high-net-worth property developers such as Barnes Realty to take advantage of the very attractive gap. Given that the target demography of the high-end properties is mainly the foreign investors, the tax treaties is a major motivation for buyers from other countries as they are exempt. Most of the prominent buyers for high-end properties in Singapore include Switzerland, the United States and Liechtenstein.

Demand for Luxury Residential Properties

The demand for high end residential properties has been on the rise in New Zealand, Hong Kong and Singapore. This trend is attributed to the decline in availability of houses for sale across the countries. New Zealand has experienced a decline in the available properties for sale across the country, except in Auckland where there is a surge in the level of development of luxury properties. The country has a stable 31 days of days-on-market for luxury properties, with the number of days falling up to 21 days in some areas with impressive improvements in sales. The increase in sales and demand for luxury properties in New Zealand is an indication that there is gap in the supply of properties in most parts of the country. In 2016, there was a 2.5% decline in the sale of luxury residential properties. Given that Auckland seems to have the greatest attractiveness to many developers, Barnes can strategize to focus on other upcoming parts of the country to take advantage of the falling days-in-market trends in luxury assets.

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Hong Kong is the second most expensive city in the world to buy luxurious properties. However, despite the high cost of living in the Asia Pacific region, demand for luxurious properties has been rising, mainly propelled by multiple factors including low interest rates, government regulation on development, and the stability of the currency. The government has put in place deliberate measures to curb the overheating luxury real estate markets. This has led to a reduction in the level of sales in the industry in the recent years. However, the government is expected to relax these measures when the conditions in the economy stabilise and become more certain.

In Singapore, the housing supply has been declining since 2015. Moreover, the planned development and private residential units has also experienced a decline in development. The downward trend was reported in the first quarter of 2016, calling for the government to step in to cater for the rising demand for residential properties. In 2016, the government of Singapore announced that it would build 18,000 new flats. This resulted in a rise of 6% construction of homes, compared to the same period in 2015. This trend shows that, the falling prices for luxury properties has resulted in low levels of development. Consequently, there is a large gap between demand and supply for high-end properties. Given the government support for foreign investment, Singapore presents a vibrant, attractive market for expansion into wide markets.

Economy

According to the IMF, the economy of New Zealand experiences a modest expansion of 2.8% in 2016, with an expected increase of 2.7% in 2017. 2013 and 2014 marked the most remarkable growth rate of 3% each, since 2007. This growth in the economy is a strong improvement in a country whose economy dipped significantly during the 2008/09 global financial crisis. Despite the five quarters of negative GDP, the country recovered swiftly to gain 13% against the US dollar. The strong economy in the country is an indication of a favourable climate for investment. This enabling environment provides a feasible opportunity for Barnes Realty to encroach into this expanding market.  The improvement of the New Zealand’s economy has been major boost to the luxury real estate market growth. Auckland alone recorded a high of 63% growth in the sale of one million-plus homes. The demand and growth in this industry is attributed to strong local and international demand for high-end properties.

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Hong Kong has not experienced a favourable economy in the past years as the country’s economy growth has been experiencing a sluggish growth since 2015. The sluggish economy was as a result of decline in the number of tourists as a decline in the country’s exports. The decline in the economy, however, improved slightly by 1% in 2016, and is expected to grow by around 1% to 2% in 2017. The IMF is optimist that the Hong Kong economy will continue growing due to the variables such as foreign money inflows, trade incomes and tourist spending. This seems to be the best entry point for Barnes into the Hong Kong market to take advantage of the stabilising economy and the improvement in the conditions of business in the country. This will allows the company to supply the deficit luxury assets in the country without being affected by the prior factors of unfavourable economy.  This can be exhibited by the rise of Hong Kong’s luxury real estate to second most expensive position in the world after London. The price of a price per square foot for these assets has grown to $2,958 (Christies International Real Estate, 2016).

Singapore’s economy has also been experiencing a decline in the growth of the economy. According to the Monetary Authority of Singapore, the growth of the economy experienced a 3% growth rate, an improvement from 2% in 2015. In 2011, Singapore reported a growth rate of 6.2%, which is a major drop compared to 3% in 2016. The rising trends in 2016 and 2017, although minimal, are an indication of an improvement in the conditions of the economy, and an opportunity for Barnes Realty to expand into the growing luxury real estate market. Worth noting is the fact that, despite the decline in the economy, the wealthiest individuals in Hong Kong continue investing in multi-million dollar properties in various parts of the world, providing a conducive opportunity for Barnes to provide the same class of properties near home.

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Laws and Regulation for the Real Estate Industry

The laws and regulations in New Zealand are a major motivation for Barnes to introduce its properties in the country. The current property laws demonstrate the most attractive property market for both local and international buyers. The country’s property laws are devoid of capital gain tax, stamp duty of visa requirement. New Zealand maintain an “open door” policy to housing, which was implemented as a result of the government’s efforts to curb price speculation. Hong Kong and Singapore have also demonstrated cooling measures in government rules and regulations as their continued commitment to encourage investment in the real estate industry. For instance, recently, the Hong Kong’s housing minister made commitment to curb property speculation by introducing effective measures. Similarly, Singapore’s National Development Minister, Lawrence Wong, maintain their the government had enacted measures to ensure the real estate market was stable and would remain to be so with an aim of preventing “premature market rebound.”

Given the stability in the real estate market in the three countries, Barnes will be able to invest and supply the deficit in the luxury properties, thereby establishing itself as one of the main developers with a major market share.

CONCLUSIONS AND MANAGERIAL IMPLICATIONS AND APPLICATIONS AND POSSIBLE RECOMMENDATIONS

The analysis of the financial, economic and social attractiveness of New Zealand, Hong Kong and Singapore reveals that Barnes Realty can effectively expand into these three markets with a view of expanding its market share.

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