What’s Next for London’s Luxury Real-Estate Market

27 November 2015, The Wall Street Journal

After four years of stellar growth, the real-estate bubble in prime central London hasn’t exactly popped. But the market seems to be going pfffftttttttt. And the outlook for 2016 isn’t promising.

By the end of the year, prices in prime London are expected to have fallen 2%, according to research from Savills estate agents. Hardest hit are homes priced above £5 million, or just over $7.6 million. Here, demand fell by almost 60% in the third quarter of this year compared with the previous quarter, according to LonRes, a property-market analyst.

Partly to blame are increases in stamp duty—a tax paid at closing by home buyers—implemented last year. Under the new system, buyers purchasing homes valued above £937,000, or about $1.4 million, will pay more in taxes. In prime central London, where the average sale price is $3.5 million, according to Cluttons estate agents, a buyer would owe the government about $288,000 in stamp duty, up from $244,000 before the increases were implemented.

Some argue that London’s top-end market was faltering even before the stamp-duty bombshell. It was “looking very over-valued,” said Lucian Cook, director of residential research at Savills. The company forecast that 2016 will be a year of zero growth in prime central London, followed by 2% growth in 2017, and a moderate 5% increase in 2018.

Not everybody sees falling prices in London’s most expensive homes as a bad thing. Buying agent Camilla Dell, managing partner of Black Brick, hopes that lower prices will reboot sales, “which have really suffered in 2015,” she said. “As we saw when prices came down 30% during the financial crisis in 2008/2009, opportunistic buyers start to pile in.”

Still, the area could see a glut of unsold homes priced at £5 million or more. “Stock is building up as we speak, and there is a conspicuous oversupply of properties for sale—some of which are thoroughly over-priced,” said Trevor Abrahamsohn, owner of Glentree International estate agents.

Developers, meanwhile, are responding to demand for less-expensive homes with lower stamp duties. The apartments are smaller, but the buildings include plenty of communal facilities. “Resident lounges, entertainment spaces, spacious gyms and spas, cinema rooms and games facilities, additional storage facilities, wine rooms, private garages and additional gardens are all almost commonplace in new developments,” said Michelle van Vuuren, managing director of residential development at UK Sotheby’s International Realty.

Buyers are also starting to look beyond prime central London for value for money. Kings Cross—a one-time red-light district in north London—shows the greatest potential, saidMartin Bikhit, managing director of Kay & Co. The area, in the midst of a sweeping revitalization effort, has excellent transportation links and an attractive mix of homes, shops, restaurants and offices, including Google’s U.K. headquarters. “The likes of Google is going to bring a great deal of wealth and footfall,” he said.

Next year, demand will come from a new wave of international buyers, agents predict.

“At the sub-£5 million level, expect Chinese buyers to flock to London due to recently reduced constraints on gaining U.K. visas for purchasing properties,” said Giles Hannah,senior vice president of Christie’s International Real Estate.

Others see newly minted billionaires from India buying prime London property. And the strengthened dollar gives buyers from the U.S. more spending power.

Additionally, Iranians looking to move assets out of the Middle East are showing increased interest in prime central London, said Faisal Durrani, head of research at Cluttons.

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