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View the article online at http://citywire.co.uk/wealth-manager/article/a716336

London luxury property boom risks turning to bust as supply climbs

by David Campbell on Nov 12, 2013 at 08:03

London luxury property boom risks turning to bust as supply climbs

The top end of the London housing market is reaching supply capacity and risks turning to bust if property continues to be built or if foreign buyers let up their current feverish demand.

‘There is a potential oversupply of homes priced between £1,000-£2,000 per square foot,’ said estate agent Savills London property development specialist Katy Warrick.

More than 20% of upper-end home buyers in 2012 were based outside of the UK. A string of new residential developments along the South bank from Battersea to London Bridge are due to reach the market in the next few years, testing demand in areas previously not  considered prime locations.    

The company pointed to a bracket it defined as ‘new prime’: new flats built outside of the traditional top-end locations and typically sold to non-London residents as either holiday homes or rentals, targeting around £5,000 per calendar month and offering a yield of between 3% and 3.5%.

‘We would question whether all new schemes can justify their premiums,’ said Warrick.

‘A slowdown in economic growth abroad and further taxation of high value property at home, could dampen demand for London homes in this bracket.

‘However, the real test will come via the rental market. Will tenants be prepared to pay the rents required to deliver the returns investors expect? We are already seeing weak rental growth in prime central London where there is plenty of rental stock.’

In contrast to rampant demand and shortages lower down the ladder, price inflation at the top end of the market has already slowed markedly, with prime residential values up 0.8% year-on-year.   

‘There are a lot of developments going up along the river sold as ‘prime’ that simply aren’t as well connected as traditional prime districts,' James Moss of London estate agent Curzon told the FT.

‘Many of the international bank and City workers who rent high-end properties simply aren’t prepared to live in those areas at those prices.’

An extension of capital gains tax to property owned by overseas residents has been one idea floated by the government in recent weeks as it has taken heat over the rising cost of living and warnings that companies may be forced to relocate from London if employees are unable to live in the region.

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