David Friedman, co-founder of WealthQuotient, talks through the recent $238 million Central Park South Penthouse purchase by hedge fund magnate and founder of Citadel, Ken Griffin, and what we can learn about ultra-high-net-worth individuals.
Over the past several weeks, the news has reported the recent $238 million Central Park South Penthouse purchase by hedge fund magnate Ken Griffin, founder of Citadel, as breaking the record for the highest residential luxury real estate purchase in history.
In striking contrast, the data is showing that 2018 was one of the most lackluster in luxury residential sales growth since 2012. How do we reconcile this seeming dichotomy between the data and Griffin’s recent acquisition?
As we seek to interpret this, there seem to be two apparent options:
- It’s an outlier and does not have any relationship to what is happening in the broader market.
- That level of purchase is completely decoupled from the market reality and bears no reflection on market trends.
In my opinion, neither of these capture the essence of what is really going on. In my conversations with some of the top luxury brokers, they all are expressing frustration with buyers who seem to be in a holding pattern waiting for the ominous market correction.
The reality is that Griffin purchased the Central Park South penthouse in contract three years earlier, and he only moved in after the actual closing recently. So, the timing of his purchase was actually outside of the current market downturn.
However, being a savvy investor, it would not be surprising if due to the market conditions he decided to pull out of the contract if he felt that the market value of the home today was well below the price he paid for it three years ago.
But the fact that he did close, despite what seems to be a softening in the market reveals and underscores the fact that he is not looking at this property primarily from an investment point of view but as a platform for being close to his office, company and employees.
There is some speculation that he even used this purchase as a platform for increasing his brand and mindshare within the public domain as he has never shared the ranks of popular recognition as some of the other top hedge fund managers.
I believe the real answer lies in the fact that every billionaire, ultra affluent and high-net-worth individual, and everyone else for that matter, all have unique economic lenses by finances and purchases are viewed.
Griffin is not different. So, without knowing him, his personal narrative, his passions, hobbies and interests and how he built his business, it’s almost impossible to generalize as to the key drivers behind his purchase and the impact of macro economic trends.
But being a hedge fund manager, he will be acutely aware of the potential recession on the horizon and its potential erosion of value this asset might experience.
His residential portfolio as percentage of his overall net worth
As it turns out, the combined value of his owner-occupied residential real estate is 5 percent of his overall net worth ($482 million as a percentage of $10 billion). So, not a significant portion of his overall wealth.
Billionaires, ultra-high-net-worth and high-net-worth are frugal
Just because someone is a billionaire does not mean that he or she doesn’t watch every penny. Anyone who deals in the ultra-affluent market can attest to the shock at how much a billionaire might be concerned about what seems to be minuscule brokerage fees in proportion to the purchase he or she might be making.
From the outside point of view, it might seem contradictory. But we are all this way, it’s only the case that the wealthy have more resources, which amplifies these types of behaviors and the seeming dichotomies they represent.
Billionaires and the ultra-affluent are a market of one
So, the question is: What does this landmark purchase tell us about what is going on in the market (against the backdrop of a stark contrast to the overall softening in the luxury market and what seem to be a broader macro recession on the horizon)?
I believe the answer is that each individual has their own narratives and ways they built their wealth that have shaped them and their worldview on wealth. So, it’s impossible to fully discern the psychological drivers behind this purchase, but we know that he valued the property enough, regardless of existing market conditions and future potential macro economic deterioration, to close on it.
If you have built your own fortune and wealth, along the way, you will have had to fight with all your soul to survive, and you will have a strong hunger to win at all costs. You will also want to control everything around you as that was the only way to actually get things done and build your wealth.
Finally, you will have watched every dollar, and while you might spend it on what others may think is superfluous, it’s your dollar, and you control it. While each person and their own personal economic lens is different and unique, there are some common fundamental impulses that run beneath anyone that has built their own business and wealth.
Finally, most wealthy individuals have made money by having “dry powder” when the market was down, or as Warren Buffett coined it, “a margin of safety.”
This margin of safety offers a billionaire or UHNW (ultra-high-net-worth) individuals the psychological cushion to pull the trigger on a purchase even if they are not sure the timing is exactly right because it gives them the economic buffer should the investment go down further or not rise like they expected.
How can I get my buyers off the fence in the face of ‘bad market conditions’?
So, what will be the trigger for all those on the fence currently to make a purchase? Yes, the market provides background data and information, but the answer will be different for each one based on their own story.
This is a great incentive for brokers to focus on uncovering and engaging that specific life narrative of their prospect, client or donor.
In my business, we preach being excavators of human narrative; be passionate about understanding someone’s story, and this will not only give you a better picture of what might be the trigger for moving on an investment, purchase or donation, but more importantly, it also helps you better serve them.
Finally even, if you were able to convince them to “get off the fence” there are two major risks:
- They have buyer’s remorse because it was not actually their decision.
- Erosion of your social capital for referrals because they fell that you pressured them into it.
Smart brokers know that the best practice is to give them all the information you can, and then let them make the decision on their own, even if buying or selling the property is the right decision from a market, data and economic perspective. It has to be their decision.