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London luxury-apartment slump triggers 20% bulk discounts

Thursday, April 7, 2016 - 18:15

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Developers in central London are offering institutional investors discounts of as much as 20 per cent on bulk purchases of luxury apartments as demand from international buyers slumps amid higher taxes and low commodity prices.

[LONDON] Developers in central London are offering institutional investors discounts of as much as 20 per cent on bulk purchases of luxury apartments as demand from international buyers slumps amid higher taxes and low commodity prices.

Concessions of about that magnitude are being offered to investors willing to take 100 homes or more, according to Killian Hurley, chief executive officer of London developer Mount Anvil Group Ltd. Broker CBRE Group Inc is negotiating discounts of as much as 15 per cent for bulk purchases on the fringes of the capital's best districts, said Chris Lacey, the company's head of UK residential investment.

A record number of high-end homes are planned in London districts such as Nine Elms and Earls Court even as demand wanes. Sales of properties under construction in the UK capital slumped 19 per cent in the fourth quarter of 2015, according to researcher Molior London Ltd, while the percentage of overseas buyers fell to 20 percent from about 33 per cent a year earlier, broker Hamptons International data show.

"We will see distress in prime central London and in Nine Elms, where there has been a lot of international investment," Andrew Stanford, UK residential fund manager at LaSalle Investment Management, said in an interview. "There have been a number of house builders who have approached us directly with schemes as a direct result of off-plan sales falling, particularly in central London."

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Berkeley Group Holdings Plc, London's biggest home builder, traded 3.2 per cent lower at 9:16 am in London. The Bloomberg UK Homebuilder Indexrose as much as 0.66 per cent.

Bulk buyers may be hard to find because the apartments being built aren't designed for the rental market, lacking features such as equal-size bedrooms, said Stanford, whose company has invested more than 325 million pounds (S$629.43 million) in UK multifamily housing on behalf of clients.

Many developers traveled to Asia to sell homes in advance of construction and secure cheaper development loans because the down payments made projects less risky. The imposition of higher purchase taxes has now reduced the appeal of the costliest properties, leaving developers wondering how they will secure funding, said Dominic Grace, head of London residential development at broker Savills Plc.  "It is a question everyone is asking, and the truth is no one really knows," Mr Grace said.

Land values in London's most expensive districts fell 1.1 per cent in the fourth quarter of 2015, compared with a 6.4 percent gain a year earlier, according to broker Knight Frank LLP. Capital and Counties Properties Plc could see the value of its development site at Earl's Court drop to 30 million pounds from 50 million pounds per acre within 12 months, Jefferies LLC analyst Mike Prew wrote in a February note. He cut his price target for the company by 20 per cent to 250p. The stock was little changed at 336.3 pence.

Mount Anvil has sold about 80 per cent of the 441 properties at its Keybridge project in Vauxhall, including a block of 100 to landlord Fabrica, at values of about 1,050 pounds a square foot, Mr Hurley said. He declined to say if the portfolio was sold at a discount.

"There is very strong demand from institutional capital - particularly from American money - and that's going to underpin the market at a time when the Asian market is a bit softer," Mr Hurley said.

Barratt Developments Plc has hired broker Cushman & Wakefield Inc to sell a portfolio of more than 300 apartments in the Fulham, Nine Elms, Aldgate and Hendon districts which will be valued at about 320 million pounds when completed, according to Estates Gazette. Barratt will only sell "if we could achieve the right values," a spokesman for the homebuilder said by e-mail. The company regularly offers bulk sales as a means of reducing marketing costs, he said.

An increase in the supply of properties in central London's best districts fueled a 1 per cent drop in rents in the 12 months through March, according to broker Knight Frank LLP. That's similar to Manhattan where a condo-development boom caused luxury apartment rents to fall 4.2 per cent in February to US$8,000 a month compared with a year earlier.

Pension funds and asset managers plan to invest as much as 30 billion pounds to invest in UK multifamily housing, according to a 2015 Savills survey, and Mr Grace forecasts significantly more portfolio sales in the future will help developers finance larger projects on the fringes of prime London.

"If they don't, we have got a problem," he said.

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