Pound's fall fails to fuel London luxury home sales

Property experts who thought that London’s luxury-home market would be kick started by the pound’s fall after the Brexit referendum are being left disappointed.

Sales of houses and apartments in the UK capital’s best districts rose less than 0.5 per cent in the three months through September from a year earlier, according to data compiled by researcher Lonres. That’s based on transactions for existing homes and new properties being sold on by speculators.

Just like it did after the financial crisis, the pound’s decline and falling values have created fat discounts for Asian investors interested in buying London’s best homes. The difference now is that many upper-middle-class residents of Hong Kong and Singapore who wanted a property in the UK capital already have one.

They’ve “been tapped out,” says Paul Donovan, global chief economist at UBS Wealth Management.

Values have fallen 15 per cent since their peak in September 2014, according to broker Savills, but the pound’s decline means buyers from Hong Kong can acquire a mansion in London’s best districts for 30 per cent below the record, according to Bloomberg calculations. For a purchaser in mainland China, it’s about 26 per cent cheaper.

Rising taxes for landlords and second-home owners, as well as declining rents, have damped demand for prime central London properties. The luxury-home market is suffering from oversupply and the wider city is at risk of becoming a bubble, UBS Group said in a report in September. Savills forecast last month that residential values in the best districts won’t match their previous peak until 2022.

Buyers living overseas piled into the London market after the financial crisis, seeking a haven from Europe’s debt crisis and turmoil in the Middle East. Almost half of the purchasers of new-build homes in central London’s best districts in the two years through June 2013 were living abroad, broker Knight Frank said at the time. Overseas buyers comprised 65 per cent of the market for homes costing £5 million (US$6.6 million) or more in the nine months through September 2011, Savills said then.

This time around there are “fewer buyers, despite the pound falling, as Chinese capital restrictions slow inflows from there, extra stamp duty and buy-to-let taxes reduce rental yields, and political uncertainty deters others,” according to Bloomberg Intelligence analyst Sue Munden. On the other hand, sellers aren’t under pressure to do deals because the market isn’t distressed, causing them to pull properties for sale rather than accept lower prices, she says.

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London's mega expensive homes push more buyers into mortgages

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Some homeowners are opting to rent out their homes instead. An increase in properties being offered for lease contributed to a 3 per cent fall in rents in September compared with a year earlier, Knight Frank said on Monday. Fewer new homes are being sold to landlords after a 3 percentage point increase in stamp duty for landlords and changes to the tax relief for mortgages.

Developers are delaying new luxury-home projects in London after the sales tax increases made building less profitable, consulting firm Arcadis NV said in June. On analyst calls in September, executives at Redrow said the firm has “no real intention” of stepping back into the market and their counterparts at Barratt Developments said sales rates are down because of a more challenging environment.

Some buyers in Asia are also getting nervous about values in districts like Nine Elms, says Huw van Steenis, global head of strategy at Schroders. The developer of Battersea Power Station, a residential and office project in the Nine Elms district, is on course to achieve less than half of its original return target as costs rise and wider economic uncertainty damps demand.

While overall purchases of London homes under construction in the second quarter climbed 30 per cent from a year earlier to about 5,800 units, the stock of unsold homes being built reached almost 26,600 units, the highest since Molior London began collecting the data in 2009.

Price growth will be moderate going forward regardless of how Brexit unfolds because of higher purchase costs, greater exposure to capital gains tax and inheritance tax for overseas owners, according to Yolande Barnes, head of world research at Savills.

UBS says there’s still reason for concern about Brexit. “We continue to advise caution given high market valuations and enormous political uncertainty,” according to the September report.

Skewed figures

In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi

Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi

Round 3: February 7-9, Dubai Autodrome – Dubai

Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi

Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia

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