London home prices lose their fizz as construction booms in city

As blocks of flats rise up over central London, the price increases of recent years that spurred on developers have come to a halt

PUBLISHED : Wednesday, 08 October, 2014, 7:16am
UPDATED : Wednesday, 08 October, 2014, 7:16am

Twenty-one cranes loom over the south bank of the River Thames from Battersea Power Station to the St George Wharf tower. Here, in the biggest concentration of residential projects in London, developers are steaming ahead just as prices are starting to fall.

Homebuilding in central London doubled in two years as record-low interest rates and demand from overseas buyers drove up values at a pace not seen since 1987. Developers such as China's Dalian Wanda Group and Britain-based Berkeley Group were drawn to the Nine Elms district, where Malaysia's Sime Darby is redeveloping the Battersea station as part of a plan to turn the neighbourhood into a prime address.

As the blocks of flats rise, the price increases that underpinned the construction boom have come to a halt. London home values fell month on month for the first time in two years in September, according to Hometrack, and builders such as Killian Hurley, chief executive of London-based Mount Anvil Group, do not see a return to red-hot growth soon.

"Over the summer months, the champagne fizz went out of the market," said Hurley, whose company plans to develop London homes worth £1 billion (HK$12.4 billion) by 2018. "The madness has gone out of it, so it's a lot more sustainable. People are becoming more discerning."

Expectations for home price growth in the capital are falling at the fastest pace since before the financial crisis, a survey by the Royal Institution of Chartered Surveyors showed. Values rose in 1 per cent of London postcodes in September, compared with 87 per cent in February, Hometrack said on September 26. Further "modest" declines are likely, the research firm said.

Though prices climbed for most of this year, the pillars supporting the London market - a cheap pound, record-low interest rates and the city's reputation as a haven for foreign buyers - have been eroding for months.

British financial officials dampened domestic demand for homes by tightening affordability checks and restricting the number of high loan-to-income mortgages.

Speculation about when the Bank of England will raise the benchmark interest rate from a record low of 0.5 per cent is also causing uncertainty in the market. The central bank's policymakers, meeting this week, have been split over whether to keep the rate at that level.

Overseas buyers have seen prices rise because of a strengthening pound, as well as new levies such as a capital-gains tax on homes sold by people living abroad. They are also wary of the opposition Labour Party's plan to raise £1.2 billion from a "mansion tax" if it gets into power after next year's general election.

The Bloomberg UK Homebuilders Index is little changed this year, compared with a 37 per cent gain in the same 10 months of 2013. Berkeley, which focuses on London and southeast England, was the worst performer in the 10-stock index, with a 15.7 per cent decline. Sime Darby fell 4.6 per cent this year in Kuala Lumpur, where it is based.

Other homebuilders with projects in London include Taylor Wimpey, which gained 3.7 per cent this year. Barratt Developments, Britain's second-largest homebuilder by market value, leads the homebuilders index with a 14 per cent increase in 2014.

The proposed mansion tax, which would disproportionately affect London, already is reducing demand for homes, according to broker Knight Frank. The central boroughs of Westminster and Kensington and Chelsea contain 46 per cent of homes valued at £2 million or more in all of England and Wales, it said in an October 2 statement.

London values will gain 5 per cent next year and remain little changed in 2016, Savills said in an August 26 report. Prices will rise 15 per cent this year, the company predicted.

There are now 22,000 central London homes under construction in London, according to Chicago-based broker JLL. The number of new homes sold in core locations fell 33 per cent in the first half of 2014 from a year earlier, it said last month. The broker defines core as Kensington to Canary Wharf on the north side of the Thames and from Nine Elms to Waterloo on the south.

New home sales in the outer core, which includes districts like Fulham, Hackney and Greenwich, rose 31 per cent to 4,800 in the same period, the broker said.

"Do not expect to see the aggressive growth that we've seen in the past three years," said Alexander Lewis, a partner at Knight Frank. "Supply is increasing, so there will be more choice and I do believe that the inferior units will suffer."

Many of the developers are targeting overseas buyers at the luxury end of the market, where rising supply has already reduced the premium paid for new flats over existing ones to 43.1 per cent at the end of the first quarter from 67.6 per cent in 2012, London-based broker Huntly Hooper said in September. Consulting firm EC Harris defines luxury homes as those that will sell for £1,250 per square foot or more.

Most domestic buyers cannot afford or do not want flats that cost more than £1,000 a square foot, JP Morgan Chase analysts including Tim Leckie wrote in a September 5 note to clients. At that rate, an owner of a 700 sq ft flat would need an annual salary of £130,000 to pay the bills, they estimated. The average London home sells for £367 per square foot, Halifax said in June.