By Neil Callanan
Anup Pankhania had to cut the offer price for apartments he’s developing in London’s Bloomsbury district by as much as 500,000 pounds ($805,000) because of a luxury-home tax that doesn’t exist yet.
The discounts are just one example of price increases for the best London homes stalling after more than five years of gains as investors wait to see if the U.K.’s Labour Party will take power next year and impose a promised annual “mansion tax” on properties valued at 2 million pounds or more. Owners of second homes who are based abroad would pay more than those who possess a single U.K. property and live in it.
“There’s too much uncertainty and that rings in the ears of all the buyers,” Pankhania, managing director of developer Jaspar Group of Companies, said in an interview. “Foreign investors get worried and that’s a direct effect of all these politics to do with this mansion tax.”
Prices of the city’s most expensive homes gained at the slowest pace in more than three years in the third quarter, according to London-based broker Marsh & Parsons Ltd. A new tax will add to concerns among overseas buyers who are already contending with a rising British pound as well as a series of levies imposed by Prime Minister David Cameron’s coalition government.
Investors’ Choice
The eight apartments in Jaspar’s Bloomsbury project were valued at an average of about 2 million pounds before the price cuts, Pankhania said. The central London boroughs of Westminster and Kensington and Chelsea contain 46 percent of homes valued at 2 million pounds or more in all of England and Wales, broker Knight Frank LLP estimates.
“Every investor has a choice and they don’t need to choose London,” Nick Candy, the property developer who helped conceive the One Hyde Park apartment project, said at a conference this month. The luxury-home market “may have a slowdown toward the back end of this year, and maybe even a pause next year, before we know who’s going to be in power.”
One Hyde Park was completed in 2011 in the Knightsbridge neighborhood and it has secured some of the highest prices ever paid for apartments in the capital including one that was valued at as much as 175 million pounds when it sold in April.
Central Districts
High-value London homes, which rose even when average prices were still dropping across the U.K., now trail the rest of the capital’s residential market. The average price in the 13 neighborhoods that Knight Frank defines as prime central London rose 7.7 percent in the 12 months through August. Houses and apartments in the U.K. capital climbed by 19.6 percent on average in the same period, according to the Office for National Statistics.
A mansion tax “threatens to douse the growth at the top tiers of the market,” Marsh & Parsons Chief Executive Officer Peter Rollings said in an Oct. 23 statement. “In London especially, thousands of ordinary families would get swept up in its wake.”
Labour, which has backed a mansion tax since last year, stepped up its support this month in an article by Ed Balls, its finance spokesman, in the Evening Standard newspaper.
“Ordinary Londoners should be protected and wealthy foreign investors must finally make a proper tax contribution in this country,” Balls wrote on Oct. 20. Those who own homes worth 10 million pounds or more “should make a much bigger contribution.”
Campaign Issue
The party plans to raise 1.2 billion pounds from the annual tax. The amount would be about 3,000 pounds a year for London-based homeowners with properties valued from 2 million pounds to 3 million pounds, according to Balls. He wasn’t specific about how much more second-home owners would pay. Labour leads the Conservatives among voters by 32 percent to 30 percent, an ICM poll published by the Sunday Telegraph found Oct. 12.
Labour’s plan will raise 120 million pounds a year from homes valued at 2 million pounds to 3 million pounds, according to an estimate by Lucian Cook, head of residential research at broker Savills Plc. That will leave 57,000 homeowners who hold property valued at more than that having to pay the rest of the 1.2 billion-pound target, he said.
“The tax charge for the remaining, more expensive properties will have to be of a different order of scale, which suggests that it will have some impact on the market,” Cook said in an Oct. 20 statement.
The plan to tax all owners of luxury homes contrasts with a proposal in New York for a levy on non-resident holders of apartments valued at more than $5 million. The owners would pay a 0.5 percent surcharge at that level, which would gradually raise to 4 percent for units valued at more than $25 million.
Lower Valuation
If the U.K. mansion tax is introduced, apartments now valued at as much as 2.3 million pounds will probably sell for less than 2 million pounds, said Michael Lister, a lecturer at University of Westminster and a former head of U.K. property lending at Bank of Ireland Plc.
“One would expect developers to find sales at, say, 2.2 million pounds, very difficult,” Lister said in an Oct. 7 e-mail. “This could lead to reductions in sale prices and difficulty in selling.”
Foreign Investment
Values in London’s best districts have risen more than 70 percent since the last trough in 2009 as overseas investors sought a safe haven for their cash and the pound slumped in value. Prices in many parts of the city have now been driven beyond the reach of most Londoners, putting pressure on politicians to rein in values and making developers more dependent on continued foreign investment.
By April, Cameron’s Conservative-led government will have introduced or extended taxes on luxury homes at least seven times, according to broker Savills Plc.
The measures include a 7 percent stamp-duty tax on home purchases of more than 2 million pounds. Chancellor of the Exchequer George Osborne also introduced a 15 percent tax on empty homes owned by companies and he’s introducing a capital gains tax for overseas owners of U.K. homes.
Sales of upscale new homes in central London are declining. The number sold in core locations fell 33 percent in the first half of 2014 from a year earlier, Jones Lang LaSalle Inc. said last month. The broker defines core as Kensington to Canary Wharf on the north side of the Thames, including Bloomsbury, and from Nine Elms to Waterloo in the south.
Outer London
“Serious developers are now looking at peripheral areas of London, which we see as growing more,” Pankhania said in an interview near Berkeley Homes Plc’s 375 Kensington High Street project, where a two-bedroom apartment is priced at 2.1 million pounds. “Central London is sort of a transient place at the moment.”
Berkeley closed down 0.9 percent in London trading today at 2,236 pence, making it the biggest decliner in the 10-stock Bloomberg U.K. Homebuilder Index.
Pankhania said he’s changing focus to districts with prices of 600 to 700 pounds a square foot because that’s a level that local buyers can afford.
That compares with 2,757 pounds a square foot for homes valued at 10 million pounds or more in the city’s best districts and about 1,200 pounds for apartments in Nine Elms, where an SP Setia Bhd. venture is developing the Battersea Power Station. Three-bedroom apartments in the latest phase of the project are offered from 1.9 million pounds and four-bed homes are priced from 3.2 million pounds.
“We’ve put barriers in place to stop investors. We have taxes that change to stop investors,” Candy said at the conference. “We wouldn’t want to look back here in five years time and think ‘everyone’s gone to Dubai or Beijing or New York’.”
This article was first published on bloomberg.com
