Aug. 29 (Bloomberg) -- Luxury-home prices in central London, the world's most expensive location for prime real estate, had their first annual decline in five years as buyers were deterred by the prospect of a recession.

The average price of houses and apartments in London's nine most expensive neighborhoods fell 1.6 percent in August from a year earlier, according to an index compiled by Knight Frank LLP. Property values declined 1.3 percent from July, the fourth straight drop, the property broker said. The index includes homes valued at about 1 million pounds ($2 million) or more.

Homebuyers were affected by ``pessimism in the financial- services sector, particularly relating to the size of this year's bonuses,'' Liam Bailey, Knight Frank's head of residential research, said in a statement.

Demand from the 300,000 bankers and others employed in financial services, which has underpinned the luxury London housing market, has dropped because of job cuts triggered by the collapse of the subprime mortgage market. Knight Frank said prime residential sales in London are down 46 percent from last year.

Nationwide Slump

Prices for homes across the U.K. declined 10.5 percent in August, the fastest annual pace in almost two decades, Nationwide Building Society said yesterday. House prices fell 1.9 percent from a month earlier, the 10th consecutive drop, Nationwide said.

Properties worth more than 10 million pounds gained 2.9 percent in August from July, Knight Frank said. The increase was fueled by wealthy overseas investors.

The top end of the market ``has proved immune from the downward trends elsewhere,'' Bailey said. ``There are now signs that the gap between this sector and the rest of the market is growing.''

Ukrainian billionaire Viktor Pinchuk spent a record 80 million pounds buying a five-story townhouse in Kensington, the Evening Standard newspaper reported in February. Pinchuk confirmed the purchase of a ``prominent'' property without elaborating.

Noam Gottesman, chairman and chief executive officer of hedge fund managers GLG Partners Inc., sold a home in Kensington Palace Gardens in June to Lakshmi Mittal, the world's fourth- wealthiest man, for 70 million pounds, according to the same London newspaper. The property, Mittal's third purchase on one of London's priciest streets, will be occupied by his son Aditya once it's been refurbished, the newspaper said.

London and southeast England accounted for more than three quarters of the million-pound homes sold last year, according to an index compiled from government data by Edinburgh-based HBOS Plc. Million-pound homes represented 0.6 percent of the 1.38 million U.K. property transactions last year.

Knight Frank compiles its monthly index from appraised values of properties in the Mayfair, St John's Wood, Regent's Park, Kensington, Notting Hill, Chelsea, Knightsbridge, Belgravia and South Bank neighborhoods of London.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net.

Last Updated: August 29, 2008 06:02 EDT