Pound's fall fails to fuel London luxury home sales

Property experts who thought that London’s luxury-home market would be kick started by the pound’s fall after the Brexit referendum are being left disappointed.

Sales of houses and apartments in the UK capital’s best districts rose less than 0.5 per cent in the three months through September from a year earlier, according to data compiled by researcher Lonres. That’s based on transactions for existing homes and new properties being sold on by speculators.

Just like it did after the financial crisis, the pound’s decline and falling values have created fat discounts for Asian investors interested in buying London’s best homes. The difference now is that many upper-middle-class residents of Hong Kong and Singapore who wanted a property in the UK capital already have one.

They’ve “been tapped out,” says Paul Donovan, global chief economist at UBS Wealth Management.

Values have fallen 15 per cent since their peak in September 2014, according to broker Savills, but the pound’s decline means buyers from Hong Kong can acquire a mansion in London’s best districts for 30 per cent below the record, according to Bloomberg calculations. For a purchaser in mainland China, it’s about 26 per cent cheaper.

Rising taxes for landlords and second-home owners, as well as declining rents, have damped demand for prime central London properties. The luxury-home market is suffering from oversupply and the wider city is at risk of becoming a bubble, UBS Group said in a report in September. Savills forecast last month that residential values in the best districts won’t match their previous peak until 2022.

Buyers living overseas piled into the London market after the financial crisis, seeking a haven from Europe’s debt crisis and turmoil in the Middle East. Almost half of the purchasers of new-build homes in central London’s best districts in the two years through June 2013 were living abroad, broker Knight Frank said at the time. Overseas buyers comprised 65 per cent of the market for homes costing £5 million (US$6.6 million) or more in the nine months through September 2011, Savills said then.

This time around there are “fewer buyers, despite the pound falling, as Chinese capital restrictions slow inflows from there, extra stamp duty and buy-to-let taxes reduce rental yields, and political uncertainty deters others,” according to Bloomberg Intelligence analyst Sue Munden. On the other hand, sellers aren’t under pressure to do deals because the market isn’t distressed, causing them to pull properties for sale rather than accept lower prices, she says.

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Some homeowners are opting to rent out their homes instead. An increase in properties being offered for lease contributed to a 3 per cent fall in rents in September compared with a year earlier, Knight Frank said on Monday. Fewer new homes are being sold to landlords after a 3 percentage point increase in stamp duty for landlords and changes to the tax relief for mortgages.

Developers are delaying new luxury-home projects in London after the sales tax increases made building less profitable, consulting firm Arcadis NV said in June. On analyst calls in September, executives at Redrow said the firm has “no real intention” of stepping back into the market and their counterparts at Barratt Developments said sales rates are down because of a more challenging environment.

Some buyers in Asia are also getting nervous about values in districts like Nine Elms, says Huw van Steenis, global head of strategy at Schroders. The developer of Battersea Power Station, a residential and office project in the Nine Elms district, is on course to achieve less than half of its original return target as costs rise and wider economic uncertainty damps demand.

While overall purchases of London homes under construction in the second quarter climbed 30 per cent from a year earlier to about 5,800 units, the stock of unsold homes being built reached almost 26,600 units, the highest since Molior London began collecting the data in 2009.

Price growth will be moderate going forward regardless of how Brexit unfolds because of higher purchase costs, greater exposure to capital gains tax and inheritance tax for overseas owners, according to Yolande Barnes, head of world research at Savills.

UBS says there’s still reason for concern about Brexit. “We continue to advise caution given high market valuations and enormous political uncertainty,” according to the September report.