Oligarch Enclaves in London Opening to Bond Buyers

Buying a home in London’s most affluent areas is becoming unattainable for anyone without a billionaire’s bank balance. For those feeling squeezed out, a Swiss private bank is offering a side door to the market.

The U.K. unit of Zurich-based EFG International AG sold bonds backed by mortgages on homes in the Knightsbridge and Chelsea districts, where Russian oligarch Roman Abramovich and billionaire shipowner John Fredriksen own homes. The average value of the mortgages is 1.5 million pounds ($2.5 million) and the loans account for about 50 percent of property values, according to data compiled by Bloomberg.

Home prices in the capital’s most desirable areas have jumped more than 60 percent since 2009, making central London the second-most expensive place in Europe to buy a house after Monaco, according to broker Knight Frank LLP. EFG’s notes will add impetus to the U.K.’s residential mortgage-backed securities market, which shrank to the smallest in four years in 2013 with sales of 4.3 billion pounds.

“They are different from the typical residential mortgage-backed security transaction in that they offer exposure to the most affluent areas in London,” said Gareth Davies, the London-based head of European asset-backed securities research at JPMorgan Chase & Co. “The bonds will likely get a lot of attention from investors.”~

Hyde Park

Knightsbridge is home to the U.K.’s most expensive apartment complex, One Hyde Park, where owners include Rinat Akhmetov, Ukraine’s richest man, and Vladimir Kim, chairman of Kazakhstan’s largest copper producer. A penthouse valued at 175 million pounds, a U.K. record, sold last month.

Buyers of the EFG bonds can’t expect to see the same stellar returns that have been achieved in the property market. They will instead have notes with AAA grades from Moody’s Investors Service and DBRS Ratings Ltd. because they’re secured by high-quality loans.

The 266 million pounds of bonds were priced yesterday to yield 75 basis points, or 0.75 percentage point, more than the London interbank offered rate, according to data compiled by Bloomberg. That’s equivalent to initial annual interest of about 1.3 percent.

“The transaction offered a rare opportunity for investors to access securities backed by prime London residential mortgages granted to wealthy individuals at a conservative average loan to value ratio,” said Kurt Haueter, head of treasury at EFG in Zurich.

London Centric

The securities are the most London-centric RMBS in the U.K.’s 204 billion-pound market for the debt, according to Alastair Bigley, an analyst at DBRS. More than 80 percent of the loans are located in London, which compares to an average of between 30 percent and 50 percent for U.K. prime RMBS transactions, he said.

EFG sold the debt through a special purpose vehicle known as Chestnut Financing Plc, and BNP Paribas SA and UBS AG arranged the deal.

London is the engine of house-price growth in Britain, with gains in the capital driving U.K. values up almost 11 percent during the year to April, the biggest annual advance since June 2007, Nationwide Building Society said this month. Prices in the capital were about 20 percent above their pre-crisis levels in the first quarter, while values in the U.K. as a whole were 2 percent below that level.

Cash-rich buyers and foreign investors seeking a haven in London property amid political and economic turmoil overseas have contributed to price gains and caused policy makers to warn of an unsustainable boom.

Bank of England

Bank of England Governor Mark Carney said on May 18 that surging home prices are the No. 1 risk to the economy. About two-thirds of respondents to Bloomberg’s monthly survey of economists predict Carney will take steps to cool the housing market next month.

Issuance of RMBS dried up after a Bank of England program to cut borrowing costs for small businesses and homebuyers provided banks with a cheaper source of funds. Banks issued 3 billion pounds of the debt this year, according to JPMorgan, compared with 31 billion pounds in 2010.

“The U.K. property market is booming but the RMBS market is not,” said Dipesh Mehta, a director of securitization research at Barclays Plc in London.

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