London stalling: inside the prime property stalemate

It’s a rainy Monday afternoon and Will Watson, a buying agent who sources expensive homes in London’s most exclusive areas, heads to a trendy hotel and restaurant in Marylebone to meet a potential client.

“He’s a member of a wealthy European family looking to spend £30mn-£40mn on a property in London,” says Watson, a partner at The Buying Solution. “His family office was advising him to buy in Switzerland or Italy but he sat with me in Chiltern Firehouse and the place was buzzing. He told me: ‘This is why I want to come to London. I may pay more in tax but life is for living.’”

Last year, sales of luxury homes in the UK capital were at their highest level for a long time — 605 properties sold for £5mn or more in 2022, according to estate agency Savills, more than any other year since at least 2006.

But by the beginning of this year, fears over the health of the global banking sector, the housing market and rising inflation had slowed the surge to a trickle. The number of properties sold in prime central London in the first quarter of 2023 was 29 per cent lower than the same period last year, according to LonRes, which tracks the city’s high-end market. At the same time, buyer demand has fallen in nearly every part of prime London since last summer, says the data company PropCast.

With spring traditionally the busiest buying season in central London, agents such as Watson are hoping for a flurry of sales in the post-Easter period. But with buyer sentiment down and many sellers still refusing to cut prices, the market may be stuck in a kind of stalemate.

One way to break the deadlock would be with an increase in international buyers — something many have anticipated since last year’s tumble in the value of the pound relative to the dollar. Earlier this year, John, a technology entrepreneur from New York, bought a house in Chelsea for just over £4mn. “I mainly wanted to own a property in London for the lifestyle but the purchase was currency-driven to a degree,” says John, who is in his early forties and did not wish to give his real name.

Although he missed out on the pound hitting an all-time low against the dollar in September, international buyers can still expect substantial savings on what they might have paid a few years ago. With demand hit by stamp duty increases and Brexit in recent years, the average price for a property in prime central London is currently 18 per cent below its peak in 2014. In dollar terms, it’s down 40 per cent, despite the pound rallying in recent weeks.

As pandemic-era travel restrictions eased, international buyers accounted for 39 per cent of sales in prime central London last year. This may be up on the year before but is still below the 2015-2019 average of 48 per cent, according to Hamptons estate agency.

Many overseas purchasers choose to buy without a mortgage — the attractiveness of which has naturally increased since interest rates rose rapidly last year. Savills says the proportion of cash buyers in the capital’s most exclusive postcodes has increased from 66 per cent in August 2022 to 74 per cent in the past six months — about on par with pre-pandemic levels. “During Covid, people were taking advantage of cheap debt, even if they didn’t necessarily need to borrow,” says Frances McDonald, director of residential research at Savills.

Now, however, buying with a mortgage is a “nightmare”, says Guy Bradshaw, managing director of UK Sotheby’s International Realty. “It’s taking so much longer and there are discrepancies and down-valuations [where the mortgage lender values a property at less than the buyer’s agreed offer price],” he says.

All this has meant that domestic buyers especially have become far more cautious. Some are redoing their sums and finding they have much smaller budgets — Watson says he has two clients who were both planning to spend £10mn on London property last year; but with mortgage rates now so much higher, they’ve slashed their budgets to about £6mn.

Buyers in general are becoming more circumspect, given that house prices are forecast to fall — Savills expects mainstream values to decline by 10 per cent this year while investment bank Nomura forecasts a 15 per cent fall by mid-2024. “We have lurched from one crisis to another and although the latest issues in the banking sector don’t directly impact London property, they affect sentiment and people’s investment portfolios,” says Camilla Dell, founder of the buying agency Black Brick. “If people are feeling less wealthy, they are going to be nervous.”

While estate agents say the so-called “best-in-class” properties are still attracting good levels of interest from buyers, analysis by Coutts bank suggests that 35 per cent of listings in prime London have undergone a price cut. Reductions are also getting bigger — the average discount in prime London is currently 8 per cent lower than its initial asking price; in July 2022, it was nearly 5 per cent, according to LonRes.

Some buyers are getting significant money off. Ashley Wilsdon, head of London at the buying agency Middleton Advisors, has just helped a client negotiate a £750,000 discount on a £5mn property in Chelsea being sold by a small developer who was highly leveraged and needed to sell quickly.

But in many cases, the discounts on offer aren’t high enough to tempt buyers. Sometimes, this is because they are baulking at properties that need work. “People are put off by both how long everything is taking and the fact some building costs have more than doubled since Covid,” says Guy Meacock, head of the London office of buying agency Prime Purchase.

More commonly, however, the issue is that many owners in prime parts of the capital haven’t benefited from the rampant house-price inflation their peers in other parts of the country have enjoyed over recent years and are refusing to reduce their prices, while estate agents have also overpriced properties in a bid to win business. “Lots of asking prices are completely unrealistic. Some properties at the top end are overpriced by millions,” says Watson.

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Drop in property sales in prime central London in the first quarter of this year, compared with the same period in 2022

Jo Eccles, founder of the property buying and management company Eccord, cites the example of a client who offered £3.2mn for a flat by the Thames in south-east London. “An identical flat sold just before Covid for £3.25mn, but the seller demanded £500,000 more and refused to budge. Like many London owners right now, they didn’t need to sell and it’s this discretionary nature of the market which is causing a pricing stand-off,” Eccles says.

Accountant Haj Abbas understands this only too well, having tried unsuccessfully to purchase a flat for about £1mn in Richmond, south-west London, for more than a year. “Properties are going on the market too high and staying there — I see the same ones online for months. Even if we put in a reasonable offer, it is rejected in favour of ‘waiting it out’ or deciding to let the property instead. We keep hearing that prices will fall nationally so don’t want to overpay, but we haven’t seen any evidence of that since we’ve been looking to buy,” Abbas, 33, says.

London’s prime outer postcodes have been some of the top performers over recent years, as buyers clamoured to buy houses during the Covid-era race for space. In Hampstead and Highgate, both in north London, Coutts says prices have increased 23 per cent since the pandemic began, while in Wandsworth, in the south-west of the capital, property prices rose 18 per cent between May 2020 and February 2023, according to Knight Frank estate agency.

Yet the rapid price rises mean some of these areas are now more vulnerable to falls compared with prime central London, and also because the south-west and west of the capital have a “larger proportion of highly leveraged [buyers]”, says McDonald.

Faced with this negative sentiment, many owners are choosing to keep their homes off mainstream portals such as Rightmove and Zoopla so that buyers can’t see how long the property has been on the market, or any price reductions. Invisible Homes, a website that matches buyers with “off-market” homes, reports that listings have quadrupled this year compared with the same period in 2022. Others who don’t need to sell urgently are holding off from selling altogether, a factor that is keeping prices from declining in nominal terms.

Tarnjeet Purewal hopes sentiment will improve in the coming months and he will finally find a buyer for his two-bedroom flat in a luxurious development overlooking the river Thames in Wandsworth, which he has been trying to sell on and off for the past 18 months.

The former real-estate lawyer and the founding director of Latitude Legal Recruitment has twice reduced the price of his flat — and now he simply hopes to get back what he paid for it in 2015. “We had quite a lot of interest last summer, but then came the ‘mini’ Budget and in the final three months of last year we didn’t have one viewing so took it off the market,” Purewal, 40, says. “The recent concerns over the banking sector are creating nervousness, but hopefully mortgage rates are levelling out and people will be keener to buy.”

Lots of asking prices are completely unrealistic. Some properties are overpriced by millions

While buyers wait it out, they are renting instead, adding to the unprecedented demand for rental homes. In February, LonRes says the number of new rental instructions in prime London was 49 per cent below its pre-pandemic average, while rents have risen 8 per cent over the past year and are now 19 per cent above pre-Covid levels.

For a one-bedroom flat in Pimlico, central London, Glenfield Property Management received 12 offers in 15 hours and agreed to let it for 26 per cent above the asking rent; in Mayfair, a two-bedroom property went for 18 per cent above the £3,000 per week asking amount. Of all the lets in Notting Hill, west London, that Strutt & Parker estate agency has agreed so far this year, 70 per cent attracted competing bids, with most going for more than the asking price.

“It’s incredibly competitive being a tenant in London right now,” says Nicholas Thao, 36, who works in finance and rents a two-bedroom apartment in Westminster. “You submit an offer and agents ask for best and finals within hours. Landlords are also asking for lump-sum payments.”

For the international super-rich, renting in London for a number of years may make financial sense — even at eye-watering prices — because stamp duty has risen so much, to a top marginal rate of 17 per cent, if they are an overseas buyer purchasing an additional home.

“We have seen the emergence of a new class of uber-renter paying £30,000-£40,000 per week,” says Trevor Abrahmsohn, managing director of north London estate agency Glentree International. “Even though they are paying up to £2mn a year in rent, this is less than the stamp duty, solicitor and estate agent fees which would be involved if they bought a multimillion-pound mansion in London and sold it a few years later.”

Back in the Chiltern Firehouse, time will tell whether Watson’s wealthy European client will opt to buy — or end up renting — that luxury London property.

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