The Ultra Wealthy Have Their Own Separate World of Real Estate

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1:01Acrobat Studio. Learn more at adobe.com slash do that with Acrobat. Hey there, I'm Joe Weisenthal. And I'm Tracy Alloway. We wanted to let you know that if you're a fan of the show, there's more to OddLots than just the podcast. That's right. In addition to this, we have a blog, a newsletter, and a Discord. Yep, go check them out. You can find the blog and newsletter at bloomberg.com slash OddLots, and you can chat with fellow listeners 24-7 at discord.gg slash OddLots.

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1:49Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, we did that episode recently on the big potential development in northern Egypt. Yes. And I'm sort of fascinated as a topic by these like huge gleaming mega cities, many of them being built in the Middle East. Tons of money pouring into these sort of just absolutely jaw dropping skyscrapers, luxury buildings, things like that. Yeah, I think we spoke a little bit about it on that episode, but it's sort of the Dubai blueprint that seems to be being copied and multiplied across the Middle East.

2:30And the question that always comes up is, well, how big can these markets actually be? Like, how much demand is there for multimillion dollar properties in tax havens? And it seems like the answer is more than you would think. These cities are kind of weird to me because I never get the impression that and you lived in Abu Dhabi, so you can correct me if I'm wrong. But it doesn't seem like there's like that much going on. Even when I see like photos of people there, like friends stopping there, like it always looks a little quiet. Am I wrong? The way I used to describe living in Abu Dhabi, and I should just add a massive caveat here, which is I left in 2018.

3:10And my understanding is that since then, Dubai has been booming in particular. There's been a lot of immigration from Russia, lots of people moving there as part of the tech industry as well. But the way I used to describe living in Abu Dhabi was it was kind of like living in the suburbs of Texas in the sense that it's very hot. Everyone drives everywhere. You don't really see people walking around on the streets that much. And you spend a lot of time at the shopping mall or the swimming pool. It doesn't sound so bad. I'd take it. It's a it's a nice lifestyle. But yes, there isn't a ton going on, although they have made efforts to change that.

3:47They've opened museums and things like that. Yeah. No. But but to the point, though, like when you see the price tags on what a penthouse in one of these buildings are going for or just, you know, how much money is being developed or to some of these buildings, like it's absolutely eye popping. You see these headlines and it's not just like one apartment sold for 100 million. It's like five apartments sold for 100 million. And I think that's the surprising thing. The other thing that's been happening. I don't know if you saw that in Dubai, they opened that Mercedes Benz tower. Did you see that?

4:20No. I'm trying to. This is a difficult topic for me because I think my personal taste veers so far away from this direction. I'm not even going to mention the fact that I obviously couldn't afford any of these properties, but it's an interesting one. I don't know. It's kind of gleaming. It's got lots of lights. If you look at photos of the interior, it's very modern. It's very clean and light and it has magnificent views of the Dubai skyline. skyline, I'm not entirely sure I would want to live there. But again, it's a moot point because there's no way that I would ever be able to afford it. It definitely now I looked it up and it definitely looks a lot different than what I imagine where I've never been, but what I imagine your place in out in the middle of nowhere in Connecticut looks like.

5:06Probably the polar opposite. OK, I want to learn more about this sort of this world of real estate for the ultra rich around the world and some of these cities and the business behind these extraordinary gleaming towers, Some of them are in nice cone shapes. Some of them look a little bit like Jenga towers of some sort. I'm really excited. We do have the perfect guest. We're going to be speaking to Hiten Samtani. He is the founder of 1031. It's a new real estate media company, former editorial director at The Real Deal, and knows real estate really well. And people who know real estate say to read Hiten.

5:39So thank you so much for coming on Odd Lots. My pleasure, guys. Thanks for having me. What's going on? What's the deal with all these big towers? the way to think about this market is it's not really a local market anymore. I think historically, when we think about luxury prices in New York, in Dubai, in Aspen, we sort of compare them locally. So I haven't opened an economics textbook in a long time, but there used to be this concept of local maximums. That no longer applies. The markets at the very, very top, I'm not talking about what the well-heeled would buy, but what the well-heeled's sort of many, many echelons higher than that would buy has blended.

6:15It's become a global little, I call it the parallel universe of this luxury market. Okay, so give us some examples of the numbers around this particular segment of luxury real estate. Because again, we're not talking about like an apartment in New York that maybe costs$2 million. We're talking about apartments that cost like 50, 100 million. What have we seen recently in terms of transactions? So the Alibaba co-founder bought a penthouse at 220 Central Park South on Billionaires Row for$190 million. That was already an apartment that a hedge funder, Daniel Oak, had paid$93 million for just a year and change ago.

6:53So that's 100 % premium on a pad like that. Larry Ellison in Florida had bought a Florida estate for$170 odd million. And the previous buyer had paid$94 million. So you're talking about these numbers that are just that defy reality. And you can't track it. You can't really map it and say, you know, it's growing 10 % a year. We're talking about a price appreciation of 50 to 75 to more than 100 % within a year sometimes. Why is that? So there's been it's a hard thing to track because there isn't really any great data that exists in this global sphere. But it seems like there's been a new kind of feudalism that's happening, which is global billionaires are now untethered to places like New York and they're looking to portfolio shop.

7:38So they're thinking more about their purchases in terms of, OK, I'm a captain of the universe, right? And I want to have my pad in New York where I take my meetings. I want to have my estate in Florida. I also want my ski chalet in Aspen. And guess what? I'm willing to pay not just a little more than the local king of the hill. I'm willing to pay double. So I don't really have competition in that market. So who's developing these properties? Are there ultra luxury specialists or is it, you know, the existing sort of normal luxury real estate developers are just building more specialized apartments?

8:12Who's actually doing it? Yeah. So one thing about developers as sort of a species is they're really, really good at rejigging their portfolios to cater to current demand. So in many cases, developers who are building, you know,$20 million apartments are saying, you know, why not go for the$50 million apartment. And in some cases, there is a one sort of a unique class of spec home developer who is saying, OK, there's X amount of billionaires in the world. There's X amount of the kind of product that they want. Let me go and build. So there's a guy called Todd Glazier out of Palm Beach, and he just built he bought an island.

8:46It's called Tarpon Island. It's the only private island in Palm Beach. He paid eighty five million for the property and then he listed it at one 185 million after obviously adding tons of bells and whistles. We're talking about 1300 feet of frontage on the water. What are the profit margins like on this kind of property? Because I have to imagine at some point there's a ceiling of how much it would cost to build these things. And so if you're just selling it for more and more money, presumably the margin is getting fatter and fatter. And that's part of what would be driving this activity. But again, I don't know, like I'm happy if my ceiling isn't falling down.

9:22So there are probably some very expensive options out there for multimillionaires that can boost the price or the cost of building. But I have to imagine the margins are part of what's driving this. The margins are incredible, right? You could make up to 60,$70 million if you do it right. But you have to take into account the incredible risk. You're carrying a spec home. You're hoping that there's a buyer that's out there for it. You're paying a ton of money to buy the property. and there's, you know, carrying costs, financing costs, construction costs. And we have seen some pretty bad flame outs.

9:54Los Angeles is a great example of this, where there was a guy called Niall Niami who was trying to sell a home for five hundred million dollars and he called it the one. And foreclosure upon foreclosure upon foreclosure. I think he's lost pretty much all his empire. Tracy, did you ever watch that documentary, The Queen of Versailles? Yes, that was great. That was at the time America's or the world's most expensive house. Is that right? Yeah. I thought of all the various films and documentaries that were sort of related to the financial crisis. I actually thought that was the best one because it really got into the financing chain behind this guy who was trying to build like a half a billion billion dollar home in Florida and how like changing fortunes quickly changes ability.

10:40And I went bankrupt. Do you know what happened with that one? I do not. I do not with that one. But I can say that the more success a developer has in a space like this, lenders start to think of it as an asset class. So if someone like a Todd is, you know, building a home, making a 40 percent markup, et cetera, then he might find a conventional lender. He may not need that wildcatting lender anymore. He might be able to find a conventional lender or partners to fund these kind of deals because he could show that there's this to create an asset class is very difficult. But if you do it and you're the first one or one of few, you can make a lot of money.

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13:09If I think of like, I want to buy a nice condo here in New York City. I like my apartment. You know, it has a decent amount of space. It has two bathrooms. That seems it's enough for me. And then I'm, you know, I have friends who have like much nicer places and some of them like have a backyard and, you know, that seems nice too. But when we're talking about like the$50 million property, what's in there? And what is like if you want to sell to that market, what does it have to have? Well, size is very important, right? So they're generally a lot of these homes will be if you're talking apartments, we're looking at 5 ,000, 7 ,000 square feet of indoor space, a couple thousand square feet of exterior space as well.

13:46Private elevators are typically a given. And then depending on the market, it can go completely crazy. Say more. Go. What's the craziest? Just tell us some crazy. Let us live vicariously. Some markets have helipads, for example. Some homes have helipads. Some of them are not operational helipads, but still a billionaire wants a helipad sometimes. Waterfront living is key. And what tends to happen with some of these billionaires, and I think this portfolio shopping point is very important, Larry Ellison, Malibu. He made his first purchase back in the, I think in the late 90s or early 2000s. Since then, he's bought 35 parcels.

14:19So when you're spending money like that on luxury real estate, you have the ability to not only influence the homes, but the entire landscape of the area. So he essentially is responsible for changing the retail makeup of Malibu as well. So don't think just about the homes. Think completely about the sort of the the area as well. That's important. Oh, that's interesting. So you can make an investment if you're a billionaire in a particular area and then kind of develop that area and presumably make more money on your investment. Absolutely. And Ken Griffin, what he's doing in Miami is probably a good example of this.

14:54Right. He has been buying up. Well, he said it was for his mom, but it's probably for him. he's been buying up trophy home after trophy home after trophy home. Now, pooled together that portfolio. The thing about Kings of the Hill, and you guys know this better than I do, is that you're a king of the hill until the next King of the Hill shows up, right? So Ken Griffin was the alpha citizen of Miami. Guess who showed up recently? Jeff Bezos. And Jeff Bezos just dropped, I think it was$90 million yesterday, I was telling you, Joe, on an Indian Creek mansion, which is his third purchase in that area.

15:24From the perspective of the billionaire, these kings of the universe, what is the appeal of like, I could see having a place in Miami and a place in Dubai and a place in London and a place in New York and a place in Malibu and a place in Hawaii. Why three in Miami? I think a lot about it as the new feudalism, right? You're trying to build this enormous land bank in some of the world's most coveted markets. There's also, I mean, we can't really deny this. There is some element of schnitzel measuring here as well, right? There has to be a little bit of that. I'm sorry, schnitzel measuring? I don't know how censored Bloomberg is.

15:58That's what I went with. I think there is an element of one-upping the other person here. So if Ken Griffin goes and buys a$60 million home, guess what? You're going to see someone like Bezos come in. I think Dubai is a great example of this. If I could get into one specific. By the way, I grew up there, so plenty of things we can talk about later. Mukesh Ambani, Indian tycoon, comes in and he buys a home for, I believe it was$80 million. Sets a record. This is Palm Jumeirah, which is that man-made island off the coast. Tracy, I'm sure you've probably been there. So he pays$80 million, smashes the record by a factor of two.

16:34Some mystery buyer comes in a few months later and pays$83 million for a home, also on Palm Jumeirah. Now, someone like Ambani, that doesn't really sit well with them. And so he comes back a few months later and he pays$163 million for another home on Palm Jumeirah. So that's why I think it's not always investment. It might just be like, hey, I am the guy here. Since you brought up Palm Jumeirah, I mean, this is like the original, almost extreme luxury development. That and what was the one that was shaped like the world? Yeah, it was just called the world. The world. That turned into like the Ponzi of all Ponzi.

17:09Yeah. So this is exactly what I was going to ask. So, I mean, Palm Jumeirah, there were eye-watering prices being paid for those properties. Same thing for the world. But then it all kind of collapsed. There was a big bust in those luxury property markets, at least in Dubai. And then it kind of came back. Are these markets still cyclical or have we kind of gone beyond that level? It's very hard to tell. It's a great question. It's very hard to tell in a market like Miami or in Dubai? Are we just looking at a wildcatting situation or is there something else? One statistic that might give us some context here.

17:42Pre-2021, there were four sales of 25 million and up in any given year in Dubai. In 2023, we had 56. Right. So who are we as, you know, snobby New Yorkers to think, is this a market that has legs or not? I think the Manhattan market was responsible for the bulk of$10 million plus sales for the longest time. it's hard to crunch the numbers because, again, there is no repository of this. But I would imagine that ratio has gone way down. And to your point, I think in these luxury markets, there is a very strong sense that without rule of law, without some recourse in Dubai or the UAE in general, has had pretty spotty sort of issues around credit and debt and all of that.

18:25I think the government there, to its credit, has been taking some really strong steps to make sure, hey, this should function like any other market, the courts and there should be recourse and all of that. So I think with that, there will always be a few scams like the world. But to your point about Palm, even though the market collapsed for a while, I'll give you a personal anecdote. An uncle of mine had bought a home on Palm for 1.5 million way back, something like 1.5 million dollars or one and change. He recently moved out of his own house to rent a villa somewhere else because the Russian is offering him one third of his purchase price in rent a year.

19:02So that kind of gives you a little - That's a great cap rate right there. There you go. But actually, I'm glad you brought up rule of law because this is where I want to go next, which is that like, look, some places are just really nice. Like Aspen, I've never been there, but I'm sure if you like to ski and I'm sure it's very nice. I like Miami. It's very nice by some measures. New York, obviously the greatest city in the world, But, you know, when you think about extreme wealth, particularly in certain countries that don't have great rule of law or where perhaps if you're out of favor with the leader, you can risk confiscation.

19:37So, you know, maybe ultra rich people in China or ultra rich people in Russia, et cetera. One way that they might want to sort of protect some of their wealth is put money in a foreign bank account. But there are like limits to that, obviously, and that's not always trivially easy. How much is this about or how much are some of these flows essentially, I don't know, rule of law arbitrage where it's like, how much can you get your wealth into a system that more or less has predictable rules? Real estate has historically been a very lax KYC type market, right? So to your point, I think capital flight is definitely a big thing.

20:14We saw the Dubai property market just absolutely take off once the war in Ukraine happened. a lot of russians and i would say the way i think of it is russian adjacent kazakhstan etc a lot of that money flowed into dubai because the uae took a very hands-off approach to judging anyone in this war so that turned out really well the the earlier example we talked about which was the alibaba co-founder if you remember the other guy he sort of went away for a while jack ma yeah right he kind of not not disappeared but he was off he fell out of favor he did disappear yeah right so So I'm not in Joe Tsai's head, but I'd imagine that part of the reason that he's willing to pay double what was already in crazy price at 220 Central Park South, a lot of that is predicated on this.

21:03Tracy, one thing that makes me wonder is whether the high price itself becomes part of the selling point, because the higher the price, the more capacity the market has to take off some of your liquid wealth. Oh, yeah, absolutely. I think that's part of it. And it's funny, this conversation just jogged my memory. Do you guys remember Arif Nockfi? Oh, absolutely. From Abraj? Who was it? The key man. Yeah. So Abraj used to be one of the world's biggest private equity funds with a specialism in emerging markets based in Dubai. And basically, they went bust. And Arif, I think, is still being prosecuted for fraud and is being extradited to the U.S.

21:41or was at some point. But when all of that was going down, I was in Abu Dhabi and I was writing a lot about this. And it turned out that his house in Dubai, Arif's house, was on like the same block as a bunch of like dictators houses. They had all moved. I can't remember the specific ones, but think African dictators. And they had all bought properties in this one particular neighborhood for the exact, presumably, reasons that we are talking about right now. Former Prime Minister of Pakistan, Pervais Bashar, also had a house there. Yeah. So the other thing I wanted to ask is, you know, in the intro, I mentioned that Mercedes-Benz Tower in Dubai.

22:22And this seems to be becoming more of a thing as well. These idea of branded luxury real estate properties. And I have to say, when I think branded property, the thing I usually think of is the Margaritaville retirement communities in Florida. But this is a whole other level. And it seems to be becoming more of a thing. What's going on there? So there are, I think, just shy of 200 active branded condo projects in the world. 40 % of them are in North America, and then they're dispersed in places like Dubai, etc. What happens, I believe it's connected to the initial point I made about this dispersion of global wealth.

22:58And so a billionaire who is from New York understands 57th Street. They wouldn't understand what Palm Jumeirah is. They might understand what Cavalli is or Mercedes-Benz or Bugatti. So there is this there is this coalescing around brands that are already known and you're piggybacking off a luxury brand to create both legitimacy and exclusivity. That's super interesting. So the Mercedes brand becomes a way it's like, well, I know Mercedes makes good stuff. They take care of their brand pretty well. They're probably not going to slap their name on some garbage project. What is the role of the brand, though, in the construction of it?

23:38Do they have input? Do they have design? Is it purely a licensing deal, but they probably do a lot of vetting? Like talk to us about the business from the brand side. Fair enough. I will say it is not a coincidence that a lot of these branded projects are in markets where there is a history of pretty sloppy construction and defects and lawsuits and all of that. Right. So this is kind of the way to say, hey, we're different from the other guys. But so the brand's role, I was talking to a couple of developers about this and one opened the kimono on how these deals actually work. And he said some brands will get really fastidious about the facade.

24:10They care about what it looks like on camera, in the artworks and marketing materials, and they will weigh in. They'll sit with your architect. They'll make you fly to Milan or Stuttgart or wherever, and they'll really weigh in on this stuff. Others are much more obsessed with the interior. So brand by brand, it really depends on that. But in general, the developer is paying between one and a half to three and a half percent, depending on how the deal is structured, to license the brand's likeness for 25 year deals that can be extended. And that's how it works. So the developer is running point on everything.

24:43The brand can choose how nitpicky it wants to be. And that is all kind of laid out in the agreement, too. How did those partnerships actually come into being? Is it the developers approaching the brands or the brands approaching developers? How do they actually meet? So one of the pioneers of this is a guy that I hope we can bring into the studio someday. His name's Gil Dezer. He's a Miami developer. And he created this thing called the Porsche Design Tower, which is this black obelisk type building, Sunny Isles Beach, which is a very Russian heavy market in South Florida. And I think he approached Porsche and they created a partnership.