London Home Presales Drop 19% as Sales Taxes Damp Demandby
A record 60,300 homes are currently under construction
'Brexit' vote risk may be putting off buyers, analyst says
Demand for London homes under construction slumped by 19 percent in the fourth quarter as rising sales taxes and global market turmoil damped demand.
Presales in the U.K. capital fell to about 5,216 from 6,444 in the same period a year earlier, according to data compiled by researcher Molior London Ltd. A record 8,818 units were sold in the first quarter of 2015.
“Construction starts have now outpaced sales for two years in a row,” Molior said in the report. “The implication is that fewer units are now being sold prior to construction than before. The evidence also suggests that fewer units are being sold prior to construction completion.”
Chancellor of the Exchequer George Osborne is increasing the stamp-duty rate for purchases of buy-to-let and second homes to as much as 15 percent for the portion above 1.5 million pounds ($2.2 million) from April. Many expensive condominiums will remain unsold in London this year, putting developers under financial stress, as values suffer a sharp downturn, Blackstone Group LP Vice Chairman Byron Wien predicted earlier this month.
The number of homes under construction in London rose by more than a third during 2015 to a record 60,300, Molior said in the report. “An industry operating at unprecedented levels is seeing cost and program overruns as a result,” the report said.
The market is polarizing toward the most expensive mansions and the cheapest homes that workers in the U.K. capital can afford, said Mark Farmer, the founder of Cast, a real estate and construction consultancy.
“There is trouble brewing in the remaining middle ground: those parts of the lower prime market that have become the domain of the international speculative investor” and “in locations where there is significant pipeline now being built out,” said Farmer, a former head of the residential team at consulting firm EC Harris LLP.
The middle market is made up of homes that sell for 1,000 pounds a square foot to 2,000 pounds a square foot, Farmer said. Those values look high when compared with rents in some of the districts, meaning investors’ returns will come under “major pressure,” he said.
In Nine Elms, the district where developers are planning to construct 18,000 homes at projects including Battersea Power Station, a purchaser would pay about 933,000 pounds to buy a 700 square foot apartment. A home buyer would require a 250,000 pound down payment and annual earnings of 153,000 pounds to purchase the property, according to mortgage provider Barclays Plc’s website.
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Overseas investors may also hold off on buying London homes because of the added risk from the U.K. possibly holding a referendum on European Union membership this year, according to Colin Sheridan, an analyst at J&E Davy Holdings Ltd. “Potential sterling weakness and an increased uncertainty around a referendum may be causing delays in decision making,” he said by e-mail.
Currency changes have also made London properties more expensive for overseas buyers. The Malaysian ringgit has slumped 15 percent against the pound in the last two years and the ruble has lost 50 percent. Blackstone’s Wien predicts that Russian and Chinese buyers will disappear from the market this year and Middle East investors will be cautious because of low oil prices.
Foreign investors are starting to sell homes because of the currency swings, said Faisal Durrani, head of research at broker Cluttons LLP. “The double whammy is that a lot of those buyers took out mortgages in the U.K. so some of them really can’t afford the repayments,” he said.