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With property, pricing is never about that first buy and sell deal. It's about sustaining those price levels longer term. Image Credit: Bloomberg

Does architecture influence real estate pricing?

Whilst the answer is obvious for the luxury segment, any number of hedonic pricing models do not offer conclusive evidence that it does so in the mid-income segment of the market. So many variables go into the final price discovery of the asset - floor plans, views, community, supply, mortgage rates, maintenance rates, etc - that it becomes complicated to delineate the effect architecture has on the overall pricing.

Perhaps, this is why in the mid-end, apartment sizes and styles converge in the primary market, and only in the secondary market do we see a price divergence emerging after a few years. However, there can be no doubt that the architecture and design of the building have positive externalities, not only specifically for the asset itself but for the community as a whole. This merits further scrutiny.

A private market for good architecture can only exist if users of the building have a willingness to pay a price higher than the opportunity cost to the developer of creating such buildings. Lost in the marketing material at the mid-end, where price sensitivity is at its highest, variables such as space, amenities and quality start to dominate any pricing model.

A cookie-cutter look

However, as communities develop in aggregate, developers either coalesce to provide essentially homogenous spaces and amenities and/or create enough product differentiation that can then lead to higher prices being demanded. In a macro environment, the greater the product variability, the greater the price differentiation.

But as prices creep up in the mid-end of the market, the TOM (time on market) the asset takes to sell starts to elongate. In an obvious sense, there is thus a tradeoff between the price of the asset and the time it takes to sell. However, in the process of price discovery mechanics, there is the qualia variable of the aesthetic.

Generally speaking, as the product moves to the higher end of the spectrum, modern and European styles start to dominate architectural design and form part of the price discovery process. In the mid-end, what we see is that views, amenities and sizes start to dominate the pricing models.

Even here, however, there have been studies conducted that show variables such as landscaping having an impact of as much as 3-4 per cent on the overall pricing of the asset. Since there are a number of stakeholders with each of them valuing their costs and benefits differently, studies have been inclusive in the academic community. When we look at micro-level building analysis, the results start to swim into focus.

Design matters

In JVC, the impact appears to be the greatest, where the difference in pricing between any two buildings in a multivariate pricing model, attributes such as corridor space, external façade styles, and landscaping account for as much as 20 per cent differential in pricing. In areas like Sports City and Discovery Gardens, where the product is more homogenous, similar studies did not reveal any price differentials.

This lack of price differentiation then starts to feed on itself in the form of longer TOM periods and insufficient demand (misconstrued as excess supply in the past). To be sure, these studies are based on listings, surveys and TOM factors, but the results are nonetheless clear: good design has a tremendous impact on the pricing of mid-income real estate assets.

This is not surprising to us and was even articulated more than 70 years ago by Le Courbusier in his “toolbox” from idea to building, when he stated “Price is not merely about numbers; it is a satisfying sacrifice”.

The value of architecture in a mid-income community emerges over time, both as social positive externalities as well as private value adds. In Dubai, the expression of this has been most visible in areas like JVC.

More importantly, developers have started noticing this trend and have responded with vigour in adding value to other communities. This is a trend that is likely to be accelerated as the market starts to re-emphasize the mid-income segment, especially in response to the current environment of rising interest rates.