Prime London Land Values Fall Most in Five Years on Tax Rise

Updated on
  • Developers are paying less for land to boost profit margins
  • Shares in developers with central London home sites lag index

London's Prime Land Values Fall

Land values in central London’s best districts fell 10.3 percent in the year through September, the biggest drop in at least five years, as higher taxes and the Brexit vote caused luxury home prices to decline.

Banks are less willing to lend for site acquisitions and construction, fueling the decline in values, broker Knight Frank LLP said in a report on Wednesday. Developers are also paying less for land because they need to raise their profit margins as a buffer against any further falls in home prices, the broker said.

“With the current level of political uncertainty, increased risk has been placed on house builders, causing them to look for greater margins,” Justin Gaze, joint head of residential development at Knight Frank, said by e-mail. Outside of central London, “demand for new homes is strong.”

The number of unsold central-London homes under construction will reach a record high this year, increasing the risk that developers’ bets on rising demand for luxury properties will go sour. Shares of property developers with large projects in the U.K. capital’s best districts have lagged competitors since the referendum after they began to write down the value of their holdings on falling sale prices.

Capital & Counties Properties Plc wrote down the value of its land holdings in the Earls Court district by 14 percent in July and they may fall a further 10 percent this year, Peel Hunt analysts including James Carswell wrote in a note to clients at the time. St Modwen Properties Plc said the value of its stake in a project in the Nine Elms district fell by 17 percent after home-value forecasts fell by almost 4 percent.

Ireland’s National Asset Management Agency appointed receivers to a company that owns a luxury-home project in London’s St. John’s Wood district after the development stalled under its current management. The project was previously offered for sale through Jones Lang LaSalle Inc. and the receivers are now considering a new strategy to dispose of the site.

Land values in London’s best districts began to surge from 2012 as developers from China to Malaysia bet that the market for luxury homes would remain strong. Instead, increases in taxes and rising values damped demand, and home prices there are now almost 11 percent below their 2014 peak, according to broker Savills Plc.

Home prices in the U.K. capital may decline as much as 30 percent as the U.K. economy weakens following the vote to leave the European Union and companies move staff overseas, Societe Generale SA analysts including Marc Mozzi wrote in July. The number of unsold homes under construction in the U.K. capital’s best districts will hit almost 11,000 this year, according to data compiled by Molior London. Molior declined to comment.

Selling high-end homes in London remains “challenging” because of market conditions, Barratt Developments Plc said in an earnings statement Wednesday.

(Updates with Barratt Developments comment in final paragraph.)
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