Luxury London property a growing headache for foreign investors

A combination of tax hikes, Brexit concerns and broker irresponsibility is only adding to the woes of those who have invested in property in the British capital.

Overpricing in Mayfair, London, has hit vendors while the picture for luxury new-build investors is even grimmer. Courtesy Lawrie Cornish

For overseas investors in luxury London developments, tumbling sales and slowing value growth of new-build and established homes makes for dismal reading – and it does not look like improving any time soon.

Years of overpricing is hurting the market in ultra-prime areas such as Mayfair, while new luxury developments are suffering even more.

The latest Land Registry data show new developments in Prime Central London (PCL) have been worst affected, said London Central Portfolio. Completed sales of new flats were down 41.4 per cent in the fourth quarter of 2016 compared with the previous year, while average prices also fell 8.7 per cent over the same period to £1.9m.

The luxury end of the PCL market saw the biggest reduction in sales. Following three successive Stamp Duty increases since 2012, a rise from 5 per cent to 15 per cent for some purchases, alongside other aggressive tax hits on foreign ownership, a 57 per cent fall in new-build sales over £5m was recorded for last year.

A 38 per cent fall in sales was also seen for new-build properties under £1m. In part that can be attributed to the fact that fewer homes are being built at that price level, which now represents just 22.5 per cent of all of PCL’s new-build sales.

Naomi Heaton, the chief eecutive of of LCP , said that although sales volumes in PCL as a whole were at their lowest level on record, average prices saw a 3.75 per cent rise over the year. However, that is a huge slowdown from the double-digit annual increases of the previous few years.

Inner London, made up of the nine inner boroughs outside PCL and including landmark developments such as the Battersea-Nine Elms stretch, also saw large reductions in new-build completions at the end of 2016. Foreign builders involved in the Nine Elms South Bank redevelopment project include China’s Dalian Wanda Group, which is behind One Nine Elms, the Anglo-French joint venture Vinci St Modwen, the developer of the New Covent Garden market sites. St Modwen said in July it had slashed £21m off the value of its share of the 57-acre site. The Battersea Power Station redevelopment, meanwhile, is underpinned by the Malaysian outfits Setia Berhad, Sime Darby and the Employees Provident Fund.

Like PCL, the luxury end of the Inner London market saw the biggest fall in new-build sales. Completions for flats above £5m were down 51 per cent across the year. The final quarter of the year also registered a significant 34.6 per cent fall in new-build sales under £1m. Concerningly, this sector represents 88 per cent of all new-builds in Inner London.

“The struggling performance of the new-build market in Inner London will certainly be beginning to worry developers,” said Ms Heaton. “It has already been reported that Battersea Power Station has reached a ‘critical stage’ and has written down its projected investment returns from 20 per cent to 8.23 per cent. As is now being seen, in areas such as Battersea-Nine Elms, there is a saturation of over-priced, over-supplied ‘commodity style’ property, which leads to a softening market, particularly during times of instability.

“With high value sales to international buyers typically off-setting the cost of providing more modest housing and essential cash-flow to reinvest into new development, the government may well struggle to deliver upon its affordable housing targets if this trend continues. Battersea Power Station has already reported financial viability issues in delivering its affordable housing targets.”

Average prices of new flats acorss Inner London fell 2.1 per cent to £721,355 in the fourth quarter compared with a year earlier, while overall sales volumes were down 3.9 per cent year on year. However, they plummeted 29 per cent on the previous quarter. Recorded sales completions in the fourth quarter were at their lowest level since the beginning of 2015.

For luxury London property owners who want to sell their home, unrealistic pricing is also battering sales figures. In Mayfair, one of the most upmarket neighbourhoods of the UK capital, asking prices have been vastly inflating above the true value for almost a decade, resulting in slower sales, price reductions and reduced vendor and purchaser confidence, according to a new report by Wetherell estate agents.

Since 2007 a 70 per cent rise in incorrect initial pricing of residential property across Mayfair has resulted in more than £1 billion worth of homes being mispriced, Wetherell said.

The report said when a Mayfair property is correctly priced it will typically sell in 3 to 6 months; if it is incorrectly priced it will take 14 months to sell and will suffer a price reduction; and if it is underpriced it can sell in just 1 to 2 weeks but the vendor may have lost out on potential revenue.

At the beginning of this month there were 160 residential properties on the Mayfair market. Homes there are currently on the market for an average of 281 days or 10 months; a figure clearly above the 3 to 6-month benchmark for correctly priced properties.

Wetherell cited a rise in property advisers, especially online, that were far less experienced in local marketplaces and agents competing for new business by promising vendors unrealistic prices for their home as a driver of the increase un overpricing.

Last year in Mayfair 45 per cent of sales were either joint or multiple agency instructions – matching exactly the proportion (45 per cent) of properties initially mispriced, it said.

“Mispricing is deeply unhealthy and extremely bad for the good reputation of estate agency professionals who are experts in their local marketplaces,” said Peter Wetherell, the chief executive of Wetherell.

“Mispricing leads to slower sales, price reductions and reduced vendor and purchaser confidence, and can all have been avoided.”

Follow The National's Business section on Twitter