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London Luxury-Home Building Accelerates

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Residential Property in London
An man polishes a sign on the metal railings outside a terraced residential property in London. Photographer: Chris Ratcliffe/Bloomberg

Nov. 25 (Bloomberg) -- Luxury-home developers plan to build more than 20,000 properties in London over the next decade, ramping up construction despite slowing price gains, consulting firm EC Harris LLP said.

The 10-year pipeline stood at 15,000 homes a year earlier, EC Harris said yesterday in a statement. There’s been a 55 percent increase in the number of homes planned in the luxury market’s lower end, mainly on the edges of neighborhoods like Mayfair and Knightsbridge.

South Asian buyers account for two-thirds of new London homes sold before completion, according to Land Securities Group Plc, the largest U.K. real estate investment trust. There’s a risk that those investors will grow weary of repeated sales exhibitions promoting London property, Mark Farmer, head of residential at EC Harris, said in the report.

“Pre-sales are happening in a much more crowded market and there are increasing challenges for developers and investors which are resulting from this,” Farmer said. “We are seeing a critical juncture in the market, especially at the lower end of the prime range, where it can no longer be a given that you should spend more to make more.”

Luxury-home values in central London rose 6.8 percent in October from a year earlier, the slowest in about four years, according to London-based broker Knight Frank LLP.

Luxury Oversupply

Developers now expect to construct London homes worth more than 50 billion pounds ($81 billion) over the decade, EC Harris said. Oversupply is unlikely in the luxury market because construction rarely happens if companies don’t achieve their pre-sales targets, the company said.

Not everybody agrees. Central London’s “top-end residential market, particularly on tower buildings, is beginning to look overpopulated for the amount of space being built,” David Atkins, chief executive officer of developer Hammerson Plc, said in a Sept. 6 interview.

About 29 percent of the planned luxury apartments will be located on the south bank of the River Thames, stretching from the area around Battersea Power Station to Tower Bridge, according to EC Harris. Developer Battersea Project Holding Co. plans to start selling 250 apartments at the station for 2,500 pounds a square foot in April, more than double the price for apartments sold in the first phase of the project.

Profit margins for developers may be squeezed by rising building costs, EC Harris said. Farmer predicts the price of building a home in London will rise about 5 percent this year and as much as 6 percent in 2014.

Advance Sales

Developers typically need to sell 30 percent to 40 percent of larger apartment projects before banks will provide credit for construction, Farmer said. The numbers can vary depending on the developer’s track record, he said.

EC Harris, based in London, defines luxury homes as those that will sell for 1,250 pounds a square foot or more. That’s up from 1,100 pounds last year.

Wealthy prospective buyers may be deterred by talk of higher taxes, Farmer wrote in the report. Chancellor of the Exchequer George Osborne is considering a capital-gains tax on the second homes of foreign owners of U.K. real estate, Sky News reported on Oct. 31.

“This issue is fast becoming the biggest cloud gathering on the horizon of London prime residential,” Farmer said.

To contact the reporters on this story: Neil Callanan in London at ncallanan@bloomberg.net; Patrick Gower in London at pgower@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

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