London Home Presales Slump as Taxes, Values Deter Buyers

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Developers Nervous as London Presales Slump: EC Harris

Demand for London homes under construction slumped by 27 percent in the second quarter as high prices and a sale-tax increase damped demand.

Presales in the U.K. capital fell to about 5,109 from 7,046 in the same period last year, broker Chestertons said, citing data compiled by Molior London Ltd.

Chancellor of the Exchequer George Osborne hurt sentiment when he raised the stamp duty sales tax for luxury homes in December, while demand has also been dented by affordability tests and loan-to-income restrictions by lenders. The slump is worrying developers because they use down-payment income from off-plan transactions to help secure construction finance.

“There’s definitely some nervousness” among developers because of the stamp-duty changes, according to Mark Farmer, head of the residential team at consulting firm EC Harris LLP. “There’s also an overall sense perhaps that London is just expensive at the moment.”

Developers are focusing on the most expensive areas including Kensington and Chelsea, which has spurred the average sale price of brand-new properties in London past 1,000 pounds ($1,540) a square foot for the first time, according to data compiled by property magazine Estates Gazette earlier this month.

Demand remains high for homes in Canary Wharf, east London’s financial district, and in other neighborhoods in the boroughs of Tower Hamlets and Newham, according to Nick Barnes, head of research at Chestertons.

Campaigning before the U.K. national election in May hurt sales at the Battersea Power Station project
Campaigning before the U.K. national election in May hurt sales at the Battersea Power Station project
Matthew Lloyd/Bloomberg

Pace ‘Slowing’

“The pace may be slowing, but off-plan sales in London are still very healthy, and in certain parts of the capital demand is still exceptional,” Barnes said.

Most buyers based in London can’t afford or don’t want apartments that cost more than 1,000 pounds a square foot, JPMorgan Chase & Co. analyst Tim Leckie said. JPMorgan is “concerned” by the number of developers targeting buyers at that level, he said.

Demand from buy-to-let investors, who purchase 60 percent of all new homes in London, may also be affected after Osborne cut tax breaks for landlords. The wealthiest investors get 45 pence back for every pound of mortgage interest they incur, the chancellor said July 8. The reduction of the allowance will start in April 2017 and be phased in over four years.

Campaigning before the U.K. national election in May hurt sales at the Battersea Power Station project, the largest in London, in the three months ended April 30, venture partner SP Setia Bhd. said in a filing.

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“The uncertainty leading up to the election did result in buyers holding off purchasing until they knew what the fiscal climate would be,” Battersea Power Station Development Co. said by e-mail. “Following the election of a stable, majority government interest has certainly increased.”

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