property investment ideas, advice, insights, trends Property Investment ideas, advice, insights, trends Property Investment News

 Property News

more news articles...

Is luxury London property bubble about to burst?


Billionaires flocking to London has seen central property prices spike. But the end of cheap money, the threat of a mansion tax and a stronger pound could mean the market's best days are behind it.

London property
Development in the West End 

A block of luxury homes in Mayfair, with views over Green Park and Buckingham Palace, has sold for a record £4,750 per square foot – and it’s not even built yet.

The 18 apartments in the Clarges complex (pictured below) are the most expensive ever purchased in the central London borough of Mayfair, with the buyer paying £210m.

Boasting a spa, a 25m swimming pool, and a private cinema, this level of opulence, once deemed to be the height of exclusivity, is becoming more commonplace in the centre of the capital.

London has overtaken Hong Kong as the most expensive city in the world based on the price per square foot of prime new builds, which has now reached £2,000.

Investors, developers and landowners such as Finchatton, Derwent and Grosvenor, respectively, are banking on this seemingly insatiable appetite for luxury residential property continuing unabated.

But as increasing numbers of cranes dot the exclusive district’s skyline, there are fears that global economic storm clouds are gathering that could threaten London’s appeal.

In fact, there are signs that the market is already cooling. Property prices in prime central London have rocketed 41pc since their pre-crash peak, but have increased a modest 3pc this year.

Arguably, the top end has dragged the UK’s mainstream housing market out of the doldrums following the 2008 crash, with foreign and domestic wealth flowing into the UK via London.

The British property moguls, Nick and Christian Candy, have been at the forefront of the luxury development wave.

The brothers spotted that London was fast becoming a magnet for the rich and famous. In 2004 they bought a shabby 1950s office block and, with £1bn of Qatari money, transformed it into the Knightsbridge flagship condominium simply known as One Hyde Park.

Wetherell’s research, seen by The Telegraph, finds that property in Mayfair is fetching a 107pc premium over nearby homes due to a lack of supply and continued international demand for the “best addresses in London”.

There are 447 units in the Mayfair development programme, most of which are former offices, embassies or old government buildings.

The development pipeline in Mayfair alone will deliver 1.5m sq ft of residential space and 285 new “ultra-prime” homes.

The property industry insists that there is an existing queue of high net- worth individuals ready to snap up these properties off-plan, and as English investors become more comfortable with buying from CGI images and developers’ showrooms, competition will increase.

A recent study from Wealth X and UBS supports this claim. The number of billionaires worldwide has increased by 7pc to 2,325 this year, and of these, 72 (worth a combined £110bn) cite London as their main home.

In addition, according to Credit Suisse, there are an additional 2,043 cash-rich multimillionaires living in the UK, a number forecast to rise 65pc to 3,381 by 2019.

During the downturn the capital’s prime property market became an investment safe haven, as foreign and domestic funds searched for tangible, long-term investments. However, experts are now warning that a series of big economic and political changes could bring that phenomenon to an end.

Deutsche Bank says that the London property market could “unravel”. One of its biggest concerns is the knock-on effect of the US stopping its quantitative easing programme last week.

The end of “easy money” in the US and UK is already dragging down the value of China’s currency, which could ultimately reduce the number of foreign buyers for prime London property.

Luxury property prices are up 41pc since their pre-crash peak. Credit: Andreas von Einsiedel

This could have a knock-on effect upon London house prices, as off-plan flats in new developments have proved wildly popular with Asian buyers.

A recent paper from economists at the European Central Bank, examining the effects of QE1 and QE2 on 65 sovereign nations, agrees, saying: “There are indeed global spillovers and externalities from monetary policy decisions in advanced economies.”

The paper found that QE2 led investors to pour money into other, primarily emerging, economies. But as the taps start to be turned off, those countries can quickly face serious challenges.

A rise in US interest rates is expected next year, which could also have a domino effect. American investors could end up back in US treasury bonds, explains Adam Challis, head of residential research at the property group JLL.

“While I don’t hear the giant sound of capital being sucked up from the global system, there could be a diluted affect on investment into global hubs such as London,” he says.

Simon French, chief UK economist at Panmure Gordon, cites issues closer to home.

“We are seeing high-end residential come off [the boil] as talk of clamping down on immigration, and a mansion tax, is sending warning signals that the UK is changing as a place to do business,” he says.

A more closed policy will limit top-end growth and make London seem less attractive when investors are considering options throughout the world. The mansion tax barracking from the Labour Party and Liberal Democrats has increased of late, with the shadow chancellor, Ed Balls, claiming that owners of properties worth £2m to £3m will pay a relatively modest £250 a month extra through this new tax — equivalent to doubling the average top band of council tax.

Paradoxically, the amount is worrying for higher-end property owners, as it suggests that Labour would need to raise substantially more revenue on homes worth over £3m, threatening to destroy the market. “It’s not the financial impact,” says French. “It’s the signal it sends. It’s not the mansion tax itself, but the conversation about mansion tax.”

Scott Corfe, chief economist at the Centre of Economics and British Research, is also bearish about the luxury London market and its ambitious pipeline of developments, drawing upon both global and domestic factors.

“We expect demand to fall back at the top end of the [London housing] market,” he says.

As sterling has strengthened, London has become less good value for money for overseas investors, says Corfe.

The Scottish independence referendum and uncertainty about our future relationship with the EU are further troubling investors.

But sterling is also looking vulnerable, with the UK budget deficit approaching record highs.

If overseas investors doubt Britain’s ability to pay back its debt, this could lead to a run on sterling, and luxury London property will lose its role as a dumping-ground for overseas money.

As one economist notes: “While some overseas investors choose London for a prestigious address or the English education system, for some it is a long-term currency play.”

In the short term, quantitative easing in Europe – which is being considered – would boost sterling.

WPP chief executive, Sir Martin Sorrell, says "I have never known a time with so many risks to the global economy."

But trouble in the eurozone, a major trade partner of Britain’s, would also affect UK GDP, as could emerging-market equities. “If they tank, this will limit the flow of capital from such countries into London property,” a city analyst adds.

However, this seems to be a divisive point – instability in China could drive more money into London. As French argues: “The burgeoning upper-middle class in Asia is only going to get more important to London.”

The UK housing market remains tied to London’s continued popularity as families and commuters cash in on inflated pricing and move further out – spreading the capital’s wealth into the South East.

The mere fact that Mipim – the international property convention that is usually held every year in Cannes – was hosted on British soil last month, shows that the luxury London market will continue to be pushed by investors, developers and even the Government.

back to top

Site Map | Privacy Policy | Terms & Conditions | Contact Us | ©2018