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London’s Mega-Mansion Owners Have a Tough Time Selling

To sell their 10-bedroom home, celebrity chef Jamie Oliver and his wife, Jools, may have to first undo what they’ve done.

Six years ago, the couple, both 41, bought adjacent townhouses in north London’s Primrose Hill neighborhood and combined them into one very large home. The couple, who have five children, now plan to move and are listing the property for £9.95 million, or about $12.1 million.

Amid a slump in London’s luxury market, the Olivers’ house has failed to sell—despite a $2.4 million price cut earlier this month. So now they’re planning to revert the house back into two properties likely to list for around $6.1 million to $7.3 million apiece. In August they obtained building permits from Camden Council to carry out the work.

Until recently, ultrarich homeowners in London who wanted more living space bought up neighboring townhouses or next-door apartments and combined them into one mega unit. In extreme cases, they bought homes on adjacent streets and then excavated cavernous basement complexes to link them up.

But while high-net-worth buyers can afford to create these urban mansions—and some still do—the decision may haunt them when it comes time to sell. That’s because market demand for these vast homes has softened significantly. The average sale price of homes in the £10 million-plus bracket ($12.19 million) has fallen 10.4% in the past two years, according to estate agents Savills. SVS -1.28 %

Moreover, local authorities are routinely refusing to grant the building permits required to combine multiple residences into one. This is partly to ease London’s severe housing shortage and partly to appease neighbors fed up with the noise and disruption of these mammoth projects.

Kensington and Chelsea Council, or RBKC, has a government-set target of increasing the number of homes in the borough by more than 700 annually. As a result, officials now reject around 50% of applications to merge homes.

Despite all this some owners will go to extraordinary lengths to achieve their goal. Late last year, Garrett Curren, chief executive officer of Credit Suisse in the U.K., was allowed to convert three apartments in Belgravia, one of prime central London’s choicest addresses, into a single property.

To persuade the RBKC to approve his project, Mr. Curren, who was unavailable for comment, paid $5.12 million for a house in nearby Holland Park. This will simultaneously be converted into four apartments, which he will be free to sell or rent out, making up for the loss of individual housing units Belgravia.

Not every owner has to go to such expensive lengths. In August, Charles Dunstone, founder of Carphone Warehouse, DC. -0.56 % was granted building permits to sink a basement beneath his home in the Holland Park neighborhood of west London. Mr. Dunston, 51, and his wife Celia, 36, own three other properties nearby and the new basements will give the properties a subterranean linkup.

The news has outraged their neighbors. They complain that the Dunstones, who have three young children, have already caused years of noise and disruption in creating their compound-style home. The Dunstones declined to comment on the furor.

Residents in Regent’s Park are no more delighted by an ongoing project by Christian Candy, the 42-year-old founder of the CPC Group and the developer behind London’s ultraluxury One Hyde Park building.

In 2014 he bought five neighboring office buildings and two houses on an adjacent street in the Regency neighborhood.

Work began last year to convert the properties into four large houses with basement levels, despite neighborhood objections over noise and traffic.

The project isn’t entirely commercial. Mr. Candy and his wife, Emily, 34, who have 3-year-old twins, are reported to be planning to live in one of the houses, although a spokesman would only say that this was “yet to be decided.”

Another way London homeowners are adding space is by buying up smaller mews houses behind their properties, which would originally have provided stabling for horses and accommodation for grooms and carriage drivers. They then link the two properties via a basement. This, some real-estate agents say, is one kind of expansion that might work in their favor commercially when they sell.

“Large houses that acquire the mews houses behind will achieve a premium once sold, due to the fact that the mews houses offer off-street parking and staff quarters above,” said Jamie Hope, director of sales at Maskells estate agents.

On Chester Square in Belgravia, a townhouse once owned by Margaret Thatcher, prime minister from 1979 to 1990, with a newly built mews house in the rear, is on the market for $33.6 million.

The newly refurbished property measures 6,229 square feet and has six bedrooms and six bathrooms, according to the listing by Savills. A new basement level features a gym, and a bar with a 500-bottle wine cellar.

Lateral space—where apartments in neighboring buildings are combined to create a huge property across a single floor—also remains popular among the ultrawealthy, said Matthew Kaye, director of Kaye & Carey.

“Lateral space today is more desirable than that found in a typical London townhouse [that spans] over five floors,” he said. He estimates that a house on a good street in South Kensington might command $2,400 to $2,800 per square foot, but that a first-floor apartment spread across two or more buildings would sell for over $3,650 per square foot.

The ultrawealthy like to live in compounds for a series of practical reasons, said Caspar Harvard-Walls partner of Black Brick, believes. They offer space for extended family and extensive leisure facilities that existing homes simply can’t accommodate.

“If you want the best nannies, the best cooks, the best butlers, you can’t just stick them in the basement or on the top floor anymore,” he added. “They require good, on site, self-contained accommodation.”

There are also emotional reasons. “It is an expression of wealth,” said Mr. Harvard-Walls. “It is meeting the demands of people with very, very large budgets.”

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Red-Hot Property Markets Cool as Rich Investors Retrench

Demand for high-end homes in London, New York slows as market turmoil hits global investors

LONDON—In August 2014, when the housing market here was on a tear, a two-bedroom condominium in one of the most expensive neighborhoods went up for sale at £3.25 million ($4.64 million), a 67% premium to its purchase price six months earlier.

The redbrick home on Cadogan Gardens in Knightsbridge is still unsold, and expectations have been revised. The price has been cut three times, the latest at the start of this year, to £2.5 million.

“It’s a great property,” said Sam Spring, a sales broker at the Chelsea office of estate agency Faron Sutaria, of the 1,250-square-foot home with dark walnut floors and high-end appliances. “It’s just a very price-sensitive market these days.”

In London’s priciest neighborhoods, the housing boom is over.

Wealthy investors, most prominently from Russia, China and the Mideast, swooped in on cities like London, New York and Vancouver to buy high-end homes in the years following the 2008 financial crisis. Real estate appeared to be a safe investment. Returns looked robust against ultralow interest rates.

Now, demand is slowing not just in London, but in prime housing markets around the world.

Average prices of luxury homes in 10 global cities analyzed by real-estate broker Knight Frank LLP are expected to rise 1.7% this year, down from 3% growth in 2015.

Foreign investors that helped drive the boom have had to contend with weakened currencies, stock-market shocks and the collapse in oil prices. Meanwhile, a major overhaul of a U.K. transaction tax known as stamp duty increased the charge on high-price sales, and new taxes on second homes and rental properties will take effect this spring.

In New York, demand for high-end homes cooled last year, brokers said. In Miami, South American and European buyers could pull back this year due to a stronger dollar, and prices are expected to fall in Hong Kong, Singapore and Paris, Knight Frank said. Swiss lender UBS Group AG said in October that housing markets in Sydney, Vancouver, San Francisco and Amsterdam appear “significantly overvalued.”

Luxury housing in London became one of the world’s hottest assets. But “the frenzy is gone completely,” said Manish Chande, senior partner at U.K. real-estate firm Clearbell Capital LLC. About 18 months ago “everything was going like hot cakes. Today it’s the total opposite,” Mr. Chande said.

Prices in prime central London, which includes high-end properties in posh districts like Mayfair and Chelsea, fell 1.4% during 2015, according to data-provider Lonres. Some neighborhoods fared worse. In Knightsbridge, prices dropped 5.6% in November compared with the year earlier, according to broker Knight Frank.

Those slides may understate what is going on: Data on high-end homes are hard to compare, because there are few of them and sellers may have the wherewithal to simply hold off rather than accept a lowered price. Transaction volumes at the top end of the London market were as much as 40% lower in December from a year earlier, according to U.K. buying agent Property Vision, and inventories of prime properties are mounting.

The standoff between buyers and sellers resulted in 2,712 homes over £1 million for sale in prime central London at the end of November, 81% more than in January 2014, according to buying adviser Huntly Hooper Ltd.

Even so, in a sign of the liquidity crunch, the gap between asking prices and sales prices is widening.

The difference between initial asking prices and average sales prices in prime central London was at a record 19% in the three months to November, Huntly Hooper data show. The disparity was 9% in the same period last year.Cadogan Gardens—four streets ringing a shared garden—sits on the Cadogan Estate, a 93-acre central London plot that has been in the same family for nearly 300 years.

The estate is on the border of Chelsea and Knightsbridge, parts of London now synonymous with fancy cars, luxury shopping and high-price penthouses.Its origins are noble. The English aristocracy once had summer palaces around the fields and marshes of Chelsea. In the 1770s, the first large-scale housing development started when Charles Sloan, the Earl Cadogan, granted a lease to architect Henry Holland to build terraced homes for moderately affluent people.In the 1800s, the area started to be swallowed by expanding London. Sloane Square tube station opened in 1868. Much of the Cadogan Estate was redeveloped in the late 1800s after falling into decline.Last year, just a quarter of the 34 homes put up for sale on Cadogan Gardens sold, and almost half were taken off the market, according to Nathaniel Wilde,head of the Sloane Square office for estate agent Hamptons International. On Eaton Place in neighboring Belgravia, home to billionaires and diplomats, only a quarter of the around 50 homes offered were sold, he said.It was a “tough year on that patch,” Mr. Wilde said. “Lots of homes are still sitting there.”The Cadogan Gardens condo for sale at £2.5 million was last sold in February 2014 for £1.95 million, according to Land Registry records. The property developer selling the condo has been renting it out, Mr. Spring said.

Superrich buyers from countries in the Mideast and Asia helped drive prices higher. But financial circumstances in those countries have changed drastically in the past year.

Oil prices, slipping under $30 a barrel, are about half the price they were in May. Demand from some investors in oil-producing countries around the Middle East and Africa has waned, property agents said.

Mideast investors made up 4% of prime central London buyers last year, compared with 15% in 2014, according to data from broker Savills PLC.

Weaker currencies have kept investors in Asia and other emerging markets at bay. The portion of buyers from the Pacific-Asia region fell to 2% in 2015 from 4%, Savills data show. In China, stock market routs amid concerns about economic growth have had an impact on buyers. Most investors from China have focused on new-build properties away from London’s historic center, agents said.

In New York’s high-end property market, the Federal Reserve noted “softer demand and a supply glut” in its December regional survey of economic conditions known as the beige book.

“There has been a dramatic slowdown at the superluxury end of the market,” said Andrew Gerringer, managing director of the Marketing Directors, new-development consultants. “When you see what’s happened in the financial markets it just puts a bit more of a chill.”

In the 90-story One57, just a couple of blocks from Central Park, a four-bedroom condo purchased by a European investor for $20.3 million in April recently sold for $17.75 million, according to the broker, James Cox of real-estate firm Compass.

While overall the New York real-estate market remains strong, Mr. Gerringer said that demand for trophy properties over $20 million has cooled substantially over the past year, and there has been some impact on the $5 million-$10 million market.

At 50 United Nations Plaza, which has views of the Empire State Building, the developers, Zeckendorf Development LLC and Global Holdings Inc., said they cut prices by 5% on some units, although they said less expensive units on the lower floors have sold for close to the asking price.

In Sydney, upscale home prices raced 15% higher in 2015, according to Knight Frank. But growth is expected to slow to 10% this year.

Rich Simeon, director of real-estate firm Simeon Manners, is waiting to see if the recent China stock market shakeout chokes off demand from Asian buyers. “It is too early to tell what is going to happen right now,” Mr. Simeon said.

Jo Eccles at London buying agent Sourcing Property said foreign buyers made up half of her business over a year ago. But now the vast majority of her clients live in London, with many working at investment banks. “The demographic has changed massively,” Ms. Eccles said.

Access to capital has also become increasingly difficult for foreign buyers exposed to falling oil prices, said Camilla Dell, managing partner at buying agency Black Brick. She said wealthy buyers from oil-rich African countries like Nigeria have struggled with liquidity in the past six to 12 months.

In the U.K., the change in stamp duty in December 2014 made homes valued over £937,000 more expensive for buyers. Stamp duty charges rise in steps to a maximum of 12% on the portion of sales over £1.5 million. The previous regime charged a flat rate based on the value of the home, with the duty rising to 7% on homes over £2 million. Last year, to compensate for the change, some sellers adjusted their prices lower, agents said.

Wealthy buyers can generally afford the outlay, said Alex Newall, managing director at Hanover Private Office. But the new tax has made people wanting to trade up to a bigger home hold off on transactions, “instead opting to do renovations or additions to their existing properties,” he said.

While the prime central London market is stuttering, prices are still pushing higher in the rest of London amid a housing shortage. The average dwelling in November sold for £506,724, up 11.2% from the year before, according to Land Registry data.

Adding to demand are buyers that a few years ago would have focused exclusively on prime central neighborhoods. For instance, some wealthy Middle Eastern buyers have started to see better value in new-build projects away from the center.

“These clients are now willing to look 10 miles out,” said Jo Leverett, head of international residential markets at estate agent Cluttons LLP. “That’s new.”

Overall, London has become drastically less affordable. When UBS warned in October that the city was at risk of a housing bubble, it noted that real earnings have fallen 7% since 2007.

“We’re due a price correction,” said Robert Nichols, managing director at London estate agent Portico. “When you can’t think of anyone who can afford to live on your street, you know there is something wrong.”

For now, areas dependent on the superrich are the ones suffering.

St. George’s Hill, a gated community in the suburbs of Surrey, became popular with wealthy Russians during the boom.

Now, around a quarter of the over 400 homes in the area are for sale or set to come onto the market, according to Hanover Private Office. Just 13 homes were sold there last year.

Wealthy Russians have pulled back from the London market amid international sanctions, the depreciation of the ruble and political pressure to rein in foreign spending, buying agents representing Russians said.

Saddle Stones, a six-bedroom mansion in St. George’s Hill, was listed in August 2014 at £9.5 million. The asking price is now £7.5 million. The home, complete with a cinema room, elevator and swimming pool, was designed with a Russian buyer in mind, said Natalia Rotenberg, founder of design firm NR Group.

Ms. Rotenberg said homes in the area remain for sale despite lavish parties thrown for potential buyers. “We’ve won awards for our interiors. But they still don’t sell,” Ms. Rotenberg said in a September interview.

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

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.

Highflying Prime Central London Comes Down to Earth

Sellers of some of London’s top luxury properties are suddenly doing the unthinkable: They’re cutting their prices.

A six-bedroom Georgian townhouse on coveted Kensington Square? Recently reduced to £7 million—about $10.9 million—from an original asking price of £8.5 million. A historic townhouse in the heart of Mayfair? Listed for £16.5 million in February, it can now be had for £14.95 million.

Not so long ago, central London’s property market was the envy of the world, with prices in golden neighborhoods like Kensington and Belgravia reaching new heights every year. Now, this highflying market is coming down to earth.

In the year ending in June 2015, prices in “prime central London” or “PCL”—the upper end of the market in coveted neighborhoods such as Chelsea, Knightbridge and Mayfair—fell 4.3%, according to real-estate firm Savills.

That slide followed years of precipitous growth. Prime central London prices climbed 25% in the year ending June 2010 alone, according to Savills, as the market rebounded from the global housing slump. By June 2014, the median price for prime central London was £3.657 million, according to Savills. Then, for the first time in years, the numbers started slipping. Today, the median price for the prime central market is £3.5 million.

According to William Hughes-Ward, a director at central London real-estate firm Marsh & Parsons, the trouble set in last year, when a shortage of stock on the market pushed prices up too quickly.

As the market continued to stall this year—at the same time that the May national election was approaching—real-estate agents widely said that buyers were spooked by the prospect of a Mansion Tax on homes valued at £2 million or more, proposed by the Labour Party. But even though David Cameron’s Conservative Party won a convincing majority, prices have failed to rebound as many agents predicted.

Buyers do have to contend with a new stamp-duty system, a government tax levied on house sales. Until December of last year, the top tax rate was a flat 7%, levied on all homes worth £2 million or more. The new, incremental system means buyers must pay 12% on the portion of a property’s price above £1.5 million (with a sliding scale of fees levied on the first £1.5 million). It is calculated that the change has raised the tax bill on all homes worth £937,000 or more.

Meanwhile the Bank of England has been threatening interest rate rises for the last two years.

International currency fluctuations have also played a part. The strength of the British pound against the euro has made London purchases more expensive for European buyers, while the devaluing of the ruble has deterred buyers from Eastern Europe.

“We have seen some of the big players such as Russians fall out of the market, mainly due to political sanctions in Russia and difficulty in getting their money out,” said Camilla Dell, managing partner at Black Brick buying agency.

The biggest problem, according to many analysts, is that prices have simply climbed too high.

“The affordability of London property, even for wealthy foreigners is now too compromised,” said buying agent Alex Newall, managing director of Hanover Private Office, a prime real-estate firm. “Some properties are 20% to 30% overpriced. Sellers need to get realistic if they want to transact in 2015.”

Overseas buyers are still active in London, agents say—just not in prime central London. Many investment buyers are now buying several small properties, rather than one trophy house, to limit Stamp Duty exposure, says Nicholas Finn, executive director of Garrington Property Finders.

The result is that markets outside of the typical “prime” areas are seeing more activity, as buyers seek out more affordable properties. Cheaper boroughs like Newham in East London saw a 17.5% hike in the 12 months ending in May, according to the Land Registry, the government’s official home price monitor. Annual prices for London overall rose 9.1%, to a median price of £475,961.

Despite PCL’s recent fall from grace, agents say there are reasons for optimism. Richard Barber, a director at W.A. Ellis estate agents, points to a strong market for central London homes priced under £2 million. He adds that continued turmoil in the Middle East may encourage more buyers from the region into the safe haven that is London.

Lucian Cook, head of residential research at Savills, forecasts that PCL prices will increase by 22.7% over the coming five years—not the heady growth of the market’s frothiest period, but still a respectable climb.

Mr. Hughes-Ward of Marsh & Parsons points out that London’s high prices are, in many ways, only relative. “For the domestic market prices are way too high,” he said. “However PCL is not a domestic market, it’s a global market. PCL should be compared to Manhattan, Paris, Singapore, Hong Kong or even Mumbai where our prices are actually looking like good value.”

Young professionals eye London’s tough neighbourhoods

The dangerous streets where a serial killer stalked his prey, a neighborhood synonymous with race rioting and an obscure working-class suburb. As potential hot spots for London’s young hipsters, these neighborhoods might seem unlikely choices. But soaring house prices are forcing Generation Y to look to areas their parents would almost certainly have bypassed.

The latest research by real-estate firm Savills, based on U.K. census data from 2011, has pinpointed 20 areas where wealthy professionals under 35 are most likely to live, and where they outnumber baby boomers by a 3-to-1 ratio.

“Even the most affluent under-35s have been priced out of traditional locations,” explained Lucian Cook, director of residential research at Savills and author of the study. “They are having to pioneer new areas.”

The No. 1 spot is Whitechapel, the East London neighborhood where Jack the Ripper killed at least five women in 1888. Bombed heavily during World War II and rebuilt with sprawling concrete high-rise buildings in the 1960s and ’70s, it isn’t immediately recognizable as the kind of neighborhood where hipsters hang out. “It is a bit of a compromise,” acknowledged Jamie Burnhope, a consultant at buying agency Black Brick. “Anyone who is used to pretty streets might have their hearts in their mouths walking around all this rather aggressive architecture.”

But what it lacks in aesthetics, it makes up for in location and value. The average property price in the area is £465,514, or about $690,000, which by Central London standards is an absolute steal. The average price in Kensington and Chelsea, the heartland of prime Central London, is currently more than $1.94 million, according to the Land Registry, the U.K.’s official home-price monitor.

Oliver Knight, an executive in the residential research department of Knight Frank, says value isn’t the only attraction: Although the area is peppered with postwar projects, it also contains some lovely homes. “The area benefits from existing high-quality property stock, including Georgian terraces as well as period commercial buildings—some of which have already lent themselves to conversion into large-scale, open-plan residential buildings not dissimilar to Tribeca in New York,” he said.

One such terraced property, a 1,287-square-foot 119-square-meter three-bedroom townhouse that’s been modernized with an open-plan kitchen and living room, is on the market for £1.1 million, or about $1.6 million.

Beyond East London, which accounts for 12 of the top 20 neighborhoods in the Savills study, the most popular address is Brixton in south London.

Brixton is a classic example of how London neighborhoods are in constant flux. It was a middle class area before World War II, but in the postwar era its fortunes waned. Projects were built and largely populated by Afro-Caribbean immigrants who suffered from high rates of unemployment. In 1981, tensions over police “stop and search” practices erupted into bloody riots. The neighborhood was hit by riots again in 1985 and 1995.

Despite this, by the end of the 1990s, middle-class buyers were starting to discover Brixton’s Victorian townhouses and excellent public-transport links. Jimmy Carr, sales manager at Kinleigh Folkard & Hayward estate agents, estimates that a four-bedroom house would today be priced at over $1.5 million. A recently refurbished three-bedroom row house with a private garden near Brixton Hill is being offered for around $1.3 million.

“It is a trendy place to live,” Mr. Carr said, adding that his buyers tend to be 30-somethings working in media or advertising. “But there are still areas which are slightly intimidating, which gives it a little bit of edginess.”

While most popular hipster locations are gritty, urban neighborhoods with a vibrant night life, Earlsfield is a notable exception. Seven miles southwest of the city center, the neighborhood has more cafes than nightclubs. But its selling points include its green space, good schools and affordable family homes.

“Earlsfield has come on leaps and bounds in the last five years,” said Jonathan Mount, a partner at the Buying Solution who liked the area so much that he moved there himself last year. “People who would once have aspired to middle-class southwest London neighborhoods like Clapham and Wimbledon have been priced out, and there has been a classic ripple effect.”

That ripple has changed the feel of the once working-class area—its thrift stores now replaced by delis and bars—and buyers now pay around $1.3 million for a three- to four-bedroom townhouse. One recently redone 1,417-square-foot period home in the area with a small studio in the back garden is asking around $1.8 million.

While Generation Y’s parents would likely have felt that a home in Earlsfield—or Brixton or Whitechapel—was a comedown, financial constraints have made them attractive. Over the past three or four decades, British home prices have risen at a far stronger rate than wages, and mortgage lending is now dependent on hefty down payments—around 25% is the norm—that few young buyers can afford.

There is, of course, another reason why Generation Y is plowing a new property furrow. “It is not just a financial issue,” said Savills’ Mr. Cook. “They probably don’t even want to live in areas their parents would like.”

Welcome to London’s Nappy Valley

On Saturday mornings Northcote Road in southwest London is abuzz. Market stalls sell artisanal bread and specialty olives to adorable nuclear families, while yoga-toned mothers with caramel highlights drink no-fat cappuccinos in the many local cafes.

Welcome to London’s original “nappy valley”—the most renowned of an elite group of London neighborhoods considered so ideal for families that buyers are prepared to pay a premium of around 20% to live there.

The nickname nappy valley is a play on Happy Valley, the enclave in pre-independence Kenya known for the hedonistic lifestyles of its wealthy expatriate community. The appeal of today’s nappy valley is far more wholesome: green space, great schools, good looks, and a very specific atmosphere.

Northcote Road is at the heart of an area locally known as “between the commons,” referring to the public open spaces of Wandsworth and Clapham Commons. Nearly 400 acres of green space—about half the size of New York’s Central Park—are dotted with play areas and tennis courts. The neighborhood also has highly rated schools, plenty of cute boutiques and high-end cafes. It also has grand period homes with spacious backyards that affluent London families aspire to. Little wonder that celebrity chef Gordon Ramsay and his wife, Tana, have chosen to bring up their brood in the area.

“Between the commons is the most child-friendly area of London,” says Ed Tryon, of Lichfields Buying Agency. “There are two excellent state primary schools; there are also a number of child-friendly restaurants and cafes that serve marmite on toast and fairy cakes for children. There are also endless summer fetes and fairs in the summer, largely aimed at younger parents and kids.”

On a more prosaic note, trains from nearby Clapham Junction offer fast links to central London, 4 miles away, as at least one parent in a nappy valley family tends to have a high-powered job in finance or tech to pay for their child’s play dates and baby Mandarin classes.

A typical four-bedroom property between the commons would cost around $1.866 million, according to Ed Mead, executive director of Douglas & Gordon. An identical house a few minutes’ walk away would be worth around 20% less.

Between the commons was the first area to earn the nappy valley title—but it does have its rivals. Chiswick, about 7 miles west of central London, also touts top schools, cafe culture and green space. The actor Colin Firth and his wife, Livia, live there with their young children, and locals believe it has a more country-village atmosphere than the sophisticated—some might say flashier—vibe of between the commons.

Real-estate agent Rachel Thompson, a partner at the Buying Solution, explains why Chiswick is catnip for parents: Not only will their children enjoy a great lifestyle, but so will they. “There are some fantastic restaurants in Chiswick,” she said. “La Trompette is Michelin starred, and Sam’s, which is backed by restaurateur/chef Rick Stein. ” There is also an outpost of the Soho House empire of private members’ clubs and restaurants for the well connected, named High Road House.

John Horton, a director of Horton and Garton estate agents, said most of his Chiswick clients are in banking and finance, their spending power evidenced by the high-end baby strollers and designer Wellington boots worn for muddy walks in Chiswick Park.

Demand for nappy valley life has put a premium on homes in Chiswick. A typical terraced Victorian house would sell for around $1.947 million, said Mr. Horton. That same property transplanted to just outside the area would be around 20% cheaper.

Historically, most nappy valley neighborhoods have tended to be in south and west London, perhaps thanks to the drift of young families out of unaffordable prime central London. But a subtly different style of nappy valley is developing farther afield, to the east of the city, around Victoria Park, an oasis of almost 200 acres of green space.

Buying agent Caspar Harvard-Walls, of Black Brick, said Victoria Park Village is beloved by slightly edgier parents who want to combine the hipster vibe of east London with the upscale amenities for their children. Victoria Park has the classic nappy valley street full of cafes, restaurants and pubs, and the schools in the area are considered among the best in London. Yet it is also popular with artists, and its streets are slightly less perfectly manicured than those between the commons or in Chiswick.

Simon Randal, senior sales negotiator at Currell Residential, said the area’s popularity with families is also due to its strong community. “This is not a transient area; people tend not to want to leave,” he said.

A typical four-bedroom terraced house in Victoria Park would cost around $2.272 million. Mr. Randal estimated that just outside the area exactly the same property would be worth $1.866 million—a difference of just under 20%. It is worth pointing out, though, that if the same house was in prime central London it could easily be worth $16 million or more.

Many of Mr. Randal’s buyers are abandoning more expensive areas like Notting Hill—not only because of its high prices. They also complain that increased gentrification has left many prime central neighborhoods feeling a bit sterile. “Victoria Park is like Notting Hill was 25 years ago,” he explained.

His clients are uniformly well-paid professionals, although they often work in creative sectors like media and advertising. “They want something a bit more bohemian than stiff upper lip west London,” he explained. “It is a paradox really—they like the fact that east London is a bit more down to earth; it is like they want to appear a bit less well off than they actually are.”

Up on the Roof

Derek Cunnington gazed out over the low-slung London skyline from atop an eight-story apartment building and liked what he saw.

“When you’re up here, you can see lots of opportunities,” said Mr. Cunnington, owner of U.K. property developer Dekra Developments.

The flat roof of Grove End Gardens, which overlooks the crosswalk on the Beatles’ famous Abbey Road album cover, is a construction site. In 18 months, Dekra will have built six luxury penthouses on top of the 1935 brick building.

Some developers are taking a novel approach to finding new building sites in crowded central London, where period homes are prized: They are adding penthouses on top of existing buildings.

London faces a housing crisis defined by the lack of centrally located homes. Its growing population requires 42,000 new homes built each year for the next 20 years, according to the office of Mayor Boris Johnson. Demand pushed the average London house price up 13.2% in January compared with the same month in 2012, the U.K.’s national statistics agency said. The housing boom is making rooftop construction more feasible.

Overseas buyers are willing to pay a premium for these newly built penthouse properties, which are rare in London, said Camilla Dell, managing partner at Black Brick, a real-estate buying agency for which foreign buyers account for 60% of the business. These buyers prefer to have modern conveniences, such as underground parking, gyms and high-tech security, Ms. Dell said.

The New Look of London

Dekra has built about 20 penthouses in London in the past seven years. The Abbey Road development, from planning to finished product, will be nearly four years in the making and cost up to $50 million.

When complete, the building will feature underground parking, elevators that bypass nonpenthouse residents, branded fixtures and iPad-controlled utilities. When buyers arrive for their first night in their new home, they will find a refrigerator and pantry stocked with food from their homeland.

About 20% to 30% of the Dekra project will be completed in a factory, Mr. Cunnington said. This modular building style means major structural aspects of the building are prefabricated, including the steel frame.

After construction in the factory, this exoskeleton will be broken into parts and trucked to the site. A giant industrial elevator will lift the pieces to the top of the building.

Dekra doesn’t use cranes. The firm uses a special machine to knock down brickwork on the roof, as opposed to a jackhammer. There is no scaffolding. This style of work costs more, and takes more time, but is meant to be out of sight, with nuisances kept to a minimum, Mr. Cunnington said.

The developer will also make overall improvements to the building, which he says will benefit existing residents. New elevators will be installed, reception areas will be renovated and a parking garage will be built under the back garden, which will be upgraded.

So far, existing residents of Grove End Gardens haven’t voiced major complaints. “I really didn’t want to trust him. He’s a developer, after all,” said David Burr, who chairs the building’s residents association. “But he has been true to his word.”

Dekra has finished two other penthouses in St. John’s Wood. They include a three-bedroom with a wraparound balcony built on an eight-story property—sold to a British buyer for $20 million—and a two-bedroom finished last year on a seven-story building that is now listed for $4.3 million.

First Penthouse, another London developer building new penthouses on existing properties, takes a different approach to construction. The company finishes 90% of the penthouse in a factory before loading it on the back of a truck, and lifting it to a rooftop with a crane, says Hakan Olsson, the company’s owner. First Penthouse is set to finish a project in the trendy Shoreditch neighborhood at the end of April. After that, a bigger penthouse is scheduled to be built near the Thames in the Royal Borough of Kensington and Chelsea, to be listed at more than $6.6 million.

Aside from costs and engineering, rooftop projects are limited by planning permissions. In the City of Westminster—where St. John’s Wood is located—about 80% of buildings fall within a conservation area, meaning “they generally won’t get penthouses built on them,” said Rosemarie MacQueen, strategic director for the built environment at Westminster. Planning laws protect access to sunlight in homes, as well as privacy from new windows peering into older ones, known as overlooking.

Another hurdle: Some buyers might be turned off by the melding of old and new construction. Ms. Dell at Black Brick said the first things potential buyers see when they go to view a penthouse is the older building under it. “Yes, people will pay premium for new-builds. Yes, they’ll pay premium for a penthouse. But because the penthouse is new doesn’t mean they’ll like the rest being old,” Ms. Dell said.

Prices Start at $80 Million

London Now Has More Homes on the Real-Estate Market Listed for £50 Million or More, Topping All Previous Price Records

Cambridge House: This home is located in Mayfair and is currently being renovated. It is listed for $402 million.

London is making history once again, this time in the realm of real estate: The capital now has more homes on the market listed for £50 million or more than at any other time on record, according to one new study. That’s $80 million for those across the pond.

According to real-estate agency Huntly Hooper, roughly $27 billion in property is on the market in prime central London, of which 14 apartments and houses are priced between $80 million and $400 million. But since at this exceptionally rarefied end of the market most of the action goes on behind closed doors, the true number is certain to be far greater.

Peter Wetherell, managing director of real-estate agents Wetherell, attributes this “exponential growth” to the financial buying power of the world’s wealthiest 5%. “They have been able to buy assets and companies at discount prices and then benefit dramatically as the global market has recovered,” Mr. Wetherell said. “These global multimillionaires and billionaires see the prime central London market as an island of stability in a turbulent world.”

David Adams, managing director of John Taylor estate agents, sells London homes priced between $3 million and $325 million. He believes homes at £50m-plus are usually clustered in three key districts: Belgravia, Knightsbridge and Mayfair.

Homes in parts of Kensington and the odd prime street in north London—namely The Bishops Avenue in Hampstead and Avenue Road in St. John’s Wood—can also command this kind of price. And a few of the larger properties around One Hyde Park in Knightsbridge and Cornwall Terrace in Regent’s Park, are selling for £50 million-plus.

The most noteworthy example came in 2011 when Ukrainian oligarch Rinat Akhmetov spent £136.4 million ($218.2 million) on a 25,000-square-foot apartment in One Hyde Park.

Mr. Wetherell divides top buyers into four categories. First are the “oil royals” from Qatar, Kuwait, Abu Dhabi, Saudi Arabia and Brunei. For example, Sheik Hamad bin Khalifa Al Thani, the emir of Qatar, acquired an office building in Mayfair in 2006 and then spent six years remodeling it into a $321 million mansion with 17 bedrooms and 14 reception rooms.

Pricey High Rise: In 2011, Ukranian oligarch Rinat Akhmetov spent about $281.2 million on an apartment in One Hyde Park, located in Knightsbridge. Bloomberg News

Other big players are tycoons from Russia and Kazakhstan, among other countries. Len Blavatnik, the Russian-born property and music mogul, owner of Parlophone Records, is restoring a home on Kensington Palace Gardens that is also said to be valued at $321 million. Neighbors on the street, which backs on to Kensington Palace, include Britain’s richest man, the steel magnate Lakshmi Mittal, who bought his house for $92 million back in 2004, and Jon Hunt, founder of Foxtons FOXT.LN 0.00% estate agents. Mr. Hunt paid about $25 million when he bought the property in 2005, but a renovation and rising values have put him in the $80-million-plus club.

Ultraprime developers like Candy & Candy, the team behind One Hyde Park, and Finchatton are also playing a big role. Last year, for example, Christian Candy spent $120 million on Gordon House, a historic but rundown property in Chelsea that he plans to develop and modernize. When complete, the property, which also includes two adjacent buildings, could be valued at as much as $321 million.

The house will have everything from a china room to a tea lounge, plus four bedrooms and a master suite with his and hers bathrooms and dressing rooms. There will also be two staff / guesthouses and a basement leisure suite featuring a swimming pool, media room, bowling alley, dance studio, two treatment rooms and a wine cellar.

Spanish developer Rafael Serrano spent a reported $96 million for a long-term lease on Admiralty Arch last year and intends to turn it into a 100-guest room hotel and private-member club, with a single three-story apartment. Owned by the government, the arch is one of London’s most historic landmarks, less than a mile from Buckingham Palace. (The Duke and Duchess of Cambridge’s carriage passed beneath the arch as they left their wedding.)

Early plans indicate the apartment will measure 16,856 square feet—some 34 times the average size of a one-bedroom apartment in London, according to figures provided by the Royal Institution of British Architects. And if prices paid at One Hyde Park are a guide, the property could be worth well over $192 million when it is finished.

When it comes to design, there is no limit to luxury. Health spas, movie theaters, beauty salons and swimming pools are all fairly standard in homes in this price range. The Formula One heiress Tamara Ecclestone created a spa for her dogs (plus a bowling alley) beneath her home in Kensington, which she bought for $72 million and enlarged. Earlier this year a $112 million home in Eaton Square, Belgravia, went on sale complete with a gold-plated swimming pool.

Developer Christian Candy spent $120 million last year on Gordon House in Chelsea. Jeff Gilbert/The Telegraph

Also on the market is a Palladian mansion in Mayfair that is named for its most celebrated owner, the Duke of Cambridge, the seventh son of King George III. It is being restored and, when complete, will have 48 rooms in 60,600 square feet. Features include a 35,000 bottle wine cellar and underground leisure complex. Estate agent Savills SVS.LN -0.08% is listing the property for $402 million.

All of these sumptuous homes are being created and sold despite growing pressure from the British government on the very top end of the property market.

Homes that back up to Kensington Palace, shown here, are among the priciest in London. Associated Press

In 2012 stamp duty rates were increased from 5% to 7% for homes sold at more than £2m ($3.2 million). But Mr. Adams says buyers have not appeared fazed by the prospect of paying a $5.6 million tax bill on a home at $80 million. After the British elections in 2015, there is a real possibility an annual “mansion tax” will be introduced on upper echelon homes. This has also failed to dampen the buying enthusiasm of the super wealthy.

Indeed many seem more interested in protecting their privacy than their tax liabilities. Also in 2012, the government increased stamp duty for people buying property through a company entity to 15%. “The government believes people buy through a company in order to evade taxes,” explained Mr. Adams. “In fact many do so for privacy reasons.”

The only impact of new tax rules that Mr. Adams has seen is that it is reducing supply at this end of the market, because some sellers—once they have added up their stamp-duty bills plus agents’ sales commissions of about 2% and the cost of moving—have decided it is not viable for them to sell up.

Despite this, Camilla Dell, managing partner of buying agency Black Brick, believes that in the long run, £50 million-plus homes will become even more commonplace in the British capital: “Property worth more than £50 million is no longer really seen as a “huge” price in the prime central London property market,” she said. “There are now a number of developments where £50 million is perfectly normal, and indeed many apartments are priced much higher than this.”