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Lenders ‘Freaking Out’ Over London Luxury Home Woes

  • Market for costliest homes weakens: Dragonfly Property Finance
  • Bank capital rules reduced appetite for development loans

Lenders are charging higher interest rates for development loans for London luxury homes as slumping commodity prices and increased taxes deter overseas buyers, fueling concern the market is oversupplied.

Debt funding construction of the costliest homes has increased by about 75 basis points to 3.75 percentage points over benchmarks since January, said Randeesh Sandhu, chief executive officer of residential development lender Urban Exposure Real Estate Plc. For large projects in central London, financing costs have risen the most since 2012 over the past six months, said William Newsom, a senior director at broker Savills Plc. A basis point is 0.01 of a percentage point.

“Everyone is freaking out,” Sandhu, whose firm has loaned close to 1 billion pounds ($1.4 billion) to developers, said in an interview. “There has been nervousness for a while in the super prime market and there is also now nervousness in prime."

Developers are constructing or plan to build about 54,000 homes in central London, according to data compiled by researcher Lonres last year, just as demand and values fall. Home prices in the U.K. capital’s best districts fell the most since June 2009 in the six months through February, according to broker Knight Frank LLP, as higher stamp duty sales taxes and turmoil in financial markets deterred buyers. The stamp duty for a 7.5 million-pound residence to be used as a second home is now more than 1 million pounds.

‘On Its Knees’

The sales market for homes valued at 2,500 pounds a square foot or more “is on its knees,” said Mark Posniak, managing director of Dragonfly Property Finance, a lender which has advanced almost 2 billion pounds to borrowers since 2008. “When you start talking about stamp duty going over 1 million pounds on a property, it cripples the market.”

Dragonfly is now avoiding financing the development of the largest and the most expensive luxury homes, Posniak said in a telephone interview. It has also reduced the amount it will lend for the construction of a luxury homes project from around 85 percent to 80 percent, he said.

Pluto Finance (UK) LLP, the specialist high loan-to-value lender backed by funds managed by Blackstone Group LP, has avoided advancing credit for projects in central London since 2013 because of oversupply fears and the market’s dependence on overseas buyers, co-founder Justin Faiz said in a telephone interview.

‘Brexit’ Threat

“The mainstream lenders appear to be very cautious and I think with ‘Brexit’ on the horizon no one wants to push the boat out too far,” said Dragonfly’s Posniak, referring to the U.K.’s vote in June about leaving the European Union political bloc.

Land values in central London’s best districts fell 0.2 percent last year compared with a 24 percent gain in 2014, according to Knight Frank. Sales of homes under construction in the U.K. capital dropped 19 percent to about 5,216 in the fourth quarter from a year earlier, data compiled by researcher Molior London Ltd. show.

Average interest rate margins for U.K. housing developments fell to 381 basis points from 453 basis points in the 12 months through June, according to a survey of lenders by De Montfort University.

Reduced Appetite

Some U.K. banks have a reduced appetite for development loans because they are required to hold significantly more capital against that type of credit compared with investment property, said Ion Fletcher, finance policy director at the British Property Federation. 

Barclays Plc is continuing to lend to high-end developments based on each project’s merits, said Brendan Jarvis, a managing director and head of real estate for Europe, the Middle East and Africa at the bank. Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc declined to comment.

At least one small lender views the reduced competition as an opportunity. Fortwell Capital, a company backed by Christian Candy’s CPC Group Ltd, is hiring three staff to lend money to the luxury residential development market, according to spokesman Bob Sturges. Candy developed the One Hyde Park apartment project in Knightsbridge as part of a venture with closely held Waterknights.


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Others are less enthusiastic.

"We are one of a number of lenders who are nervous about central-London residential development,” said Faiz at Pluto. “You have a market that looks a bit out of kilter.”

(Corrects spokesman's name in third paragraph after Reduced Appetite subheadline.)
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