POLARISED MARKET AND PRICING STRATEGY
Even the best strategy falters if it is not executed with rigour.
POLARISED MARKET AND PRICING STRATEGY
Even the best strategy falters if it is not executed with rigour.
By Daniel Caprarin e Irene Gómez
In the current market context, where double-digit growth has been recorded in prime residential prices, a closer look is warranted to fully understand underlying pricing dynamics.
Unlike other real estate segments such as offices, hotels or logistics, the residential sector is the most familiar to the general public, and price setting in this space carries a strong element of contagion between recently sold properties and those currently on the market.
This is a natural phenomenon for assets that share many similarities. However, as properties become less homogeneous, this contagion effect begins to weaken.
And this is precisely the case in the prime residential market, where homes develop a distinct identity through their architectural typology, the nature of refurbishments undertaken and the design of their interiors. In addition, Madrid’s prime residential sector is experiencing a particularly dynamic moment, with strong demand from both domestic and international buyers.
This appeal is driving transactions of prime homes at price levels approaching €25,000 per square metre. Encouraged by this trend, many sellers are seeking to align with prices that have exceeded previous ceilings. However, while some prime properties have reached these levels, this is not a generalised pattern across the Madrid market.
This is why we are observing what is known as a “polarised market”, where prime properties exhibit differing price behaviours and do not necessarily influence one another. The fact that certain homes have achieved these price points does not mean the same can be applied to others.
As expected, some sellers attempt to enter the market with asking prices above market value or equilibrium price—the level that buyers are willing to accept.
What happens when the asking price exceeds the market price?
To answer this question, and drawing on Knight Frank’s track record of prime residential transactions—the Research team has developed a theoretical model on the initial pricing strategy of a prime property.
This framework combines marketing time and the probability of a successful sale, and is based on what we refer to as the “informed buyer”, a common profile within the prime segment. This term refers to those who benefit from specialised advisory in such transactions, an area in which Knight Frank is a recognised leader.
The chart illustrates, on the left axis, the percentage by which the asking price of a prime property may exceed its market value, while the right axis shows the number of days on the market from initial listing to sale.
To analyse it, we begin with the central scenario: a prime property is brought to market at a price aligned with buyer expectations, that is, without any premium. In this case, the theoretical model estimates that, on average, the property could be sold within 90 days, with an 80% probability of success.
However, some sellers, encouraged by rising price levels, attempt to list properties above what buyers are willing to accept.
"An equilibrium price set from the beginning of the commercialization process is the most efficient strategy to maximize results."
In this case, we move to the second scenario of the chart, where a 10% price premium is added to a property. The probability of a successful sale decreases from 80% to 40%, and the marketing period shifts from 90 days to 120 days. As the probability of not selling is 60%, it is possible that, after those 120 days, the property remains on the market. If the seller still wishes to sell the property, there are two options: to temporarily withdraw it from the market and then try again, or to keep it on the market and apply a discount to the equilibrium price.
In other words, a discount on the premium would not be sufficient to reach the market price of the property in question, since there are already properties on the market with similar characteristics priced in line with the market. Therefore, the 5% must be applied to the equilibrium price for the property to become attractive again. Ultimately, the seller would end up obtaining a price 5% lower as a result of having initially listed the property with a premium.
In other cases, these premiums could be of greater magnitude.
In the third scenario, with a 15% premium, the probability of success falls to 20% and the timeframe extends to 180 days. In this context, the probability of the property not being sold increases to 80%. And, as previously mentioned, if the owner wanted to achieve a successful sale, it is expected that a 7% discount would be applied to the equilibrium market price.
In conclusion, in a polarized market, such as the one currently being observed in the prime residential sector, price behaviour varies depending on the characteristics of each property.
On the other hand, premiums achieve the opposite effect: the seller ends up obtaining a lower price from the sale compared to the price that would have been achieved if the property had been launched on the market at an equilibrium price.
An equilibrium price from the beginning of the commercialization process remains the most efficient strategy to maximize results.
