London Luxury-Home Price Drop Narrows on Scarcity

By Simon Packard, Bloomberg

Nov. 6 (Bloomberg) -- Luxury-home prices in London had their smallest annual decline in 15 months in October on a shortage of properties for sale, Knight Frank LLP said.

The average value of houses and apartments costing more than 1 million pounds ($1.7 million) fell 3.2 percent from a year earlier, the seventh consecutive month of narrowing losses, the London-based property broker said. Prices increased 2.1 percent from September, the most since July 2007. That left values 16 percent below their March 2008 peak.

Luxury residences in neighborhoods like Chelsea, Kensington and Mayfair may return to peak prices in 2012, a year or two sooner than the rest of the U.K. housing market, Knight Frank and Savills Plc estimate. The pound’s 19 percent decline against a basket of currencies since the home market’s peak revived demand from foreign investors.

“The shortage of good property for sale is acute,” said Nathalie Hirst, the London head of Prime Purchase, which acts for wealthy buyers. “People have been able to hold onto their properties, so there haven’t been any forced sales.”

The Bank of England’s record-low benchmark interest rate of 0.5 percent eased pressure on homeowners to sell and reluctance among banks to repossess properties also limited the number of homes available.

Knight Frank estimates the number of luxury properties on sale for the first time fell almost 60 percent from October 2008, while the number of overseas buyers climbed 45 percent. The annual price decline was the smallest since July 2008.

Competing Bids

Two weeks ago, a buyer agreed to purchase an apartment near Hyde Park that’s been on Knight Frank’s books for 14 months. The initial asking price of 3.75 million pounds had been lowered to 3.45 million pounds before competition between buyers lifted the agreed price to 3.7 million pounds, said Rupert des Forges, head of the broker’s Knightsbridge office.

“The improved confidence and prices show the resilience of the prime London market,” he said. “Long-term investors have been waiting 10 years for this moment.”

The largest price gains were in Chelsea, Kensington and Notting Hill, Knight Frank said. It calculates that a 2 million- pound home in those neighborhoods appreciated by 1,340 pounds a day in the three months through October.

Second Homes

About 80 percent of potential buyers of high-end homes in central London this year haven’t been seeking a primary residence, according to Beauchamp Estates founder Gary Hersham; most are looking for a second home or a rental property. Half are from abroad, particularly from the euro region, seeking to take advantage of the pound’s decline, he said. The British currency has lost about 10 percent of its value against the euro in the last 12 months.

“The flow of buyers from such places as the Gulf, Kazakhstan and Ukraine is constant,” said Hersham, who set up his Mayfair-based firm 30 years ago.

“The undoubted driver of strong price growth in recent months has been the return of the U.K. buyer, particularly those employed” in the City of London financial district, said Liam Bailey, Knight Frank’s head of residential research.

The proportion of U.K.-based buyers of 5 million-pound homes rose to 67 percent in the three months through October from 43 percent in the preceding three months, Knight Frank said.

Bonus Watch

Lindsay Cuthill, head of Savills’s chain of brokers in southwest London, said six weeks ago that he had started to receive more buying inquiries from bankers at Goldman Sachs Group Inc., JP Morgan Chase & Co., Barclays Plc and Morgan Stanley, four of the investment banks that best weathered the financial crisis. None of those has yet turned into a purchase, he said at a presentation yesterday.

Savills estimates that about 1.2 billion pounds of bonus payments for 2009 earnings may be invested in real estate, with about half going into rental properties in London and southeast England. It’s unclear how much of the payouts will be deferred or handed out as share options following government pressure to restrict cash bonuses.

“The big question over this year’s bonuses is ‘How will they be paid?’” said Yolande Barnes, head of residential research for Savills. The broker estimates that luxury values probably will fall 1 percent in 2010 after a 6.1 percent gain this year.

National Recovery

The gains in London’s luxury properties mirror signs of price recovery at a national level.

U.K. home prices registered their first annual gain in 19 months in October, Nationwide Building Society said last week. The average cost of a home increased 0.4 percent to 162,038 pounds, the sixth consecutive monthly increase, the mortgage lender said.

London accounts for 57 percent of the 183,630 U.K. houses and apartments worth more than 1 million pounds, according to property search Web site Zoopla.co.uk. Britain’s largest concentration of those is in Kensington, where the average price is 1.46 million pounds.

Knight Frank compiles its luxury index from estimated values on properties in the Mayfair, St. John’s Wood, Regent’s Park, Kensington, Notting Hill, Chelsea, Knightsbridge, Belgravia and South Bank neighborhoods of London.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net.
Last Updated: November 6, 2009 08:00 EST