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Trophy properties for wealthy foreigners hit by growing supply and falling demand

A 24-hour butler service. Interiors by Versace. A swimming pool suspended mid-air between buildings.

These are some of the unusual features available with new London luxury apartments, tens of thousands of which are being built all over the capital. All that is missing are the buyers.

More than 50,000 homes are planned or under construction in the most expensive areas of London — after a building boom that followed the 2008 crisis, when prime property recovered quickly and overseas buyers piled into the UK capital.

Even though 2014 was a strong year for sales, only 3,900 homes worth more than £1m were sold in central London.

Now, as more shiny residential towers rise on the banks of the River Thames, buyer appetite has paled.

JLL, the US-based property group, predicts that prices for new-build homes in central London will fall 3 per cent in 2016, and not rise again until 2018. Only three months ago it was forecasting a 1 per cent increase this year.

Falls in Asian currencies, the rouble and the oil price have cut deep into the purchasing power of overseas buyers. Changes to the UK stamp duty tax have piled additional charges on to homes costing more than £937,500.

In essence, the London market — once the favoured choice for a trophy property among wealthy international investors — is suffering the uneasy combination of growing supply and shrinking demand.

The effects are already being felt on developers.

Shares in Capco, a London property company, dropped 8 per cent after it revealed last Wednesday that sales of apartments in its Lillie Square development in west London — which cost between £600,000 and £6m — had not risen since November. The company cited “challenging conditions . . . as a result of increasing supply”.

Capco’s shares are down 27 per cent since the start of the year and investors have also punished other UK-listed companies. Shares in St Modwen, which owns 57 acres of development land in Battersea, south of the Thames, are down by a fifth. Meanwhile four hedge funds have taken short positions against Berkeley Group, a high-end UK housebuilder.

Overseas developers offering flats priced above £1m in central London — including Hong Kong’s Hutchison Whampoa and the Qatari state investment fund Qatari Diar — are also exposed.

In London’s “prime fringe” areas, developers include the Irish group Ballymore, China’s Dalian Wanda, Dubai’s Damac and a Malaysian consortium.

Analysts say there is concern some of these companies may have to write down the value of some development holdings.

“I suspect the land prices will actually start falling,” says Hemant Kotak, analyst at Green Street Advisors. “The stock market is much more negative than valuers are, and than the private market is.”

Many of London’s luxury new-builds have been marketed overseas, especially in Asia.

Developers have been “catering for the mass growth of international wealth, all of whom saw London as a great vehicle for investment”, says Roarie Scarisbrick, partner at Property Vision, an estate agency.

Luxury London new-builds are heavily advertised in Hong Kong, where the daily newspaper The Standard carries a weekly section dedicated to the UK property market. Billboards and print advertising in the Chinese territory, with glossy images of riverside views and dramatic skylines, direct potential buyers to property shows held in swanky hotels.

But Geoffrey Lau, a property negotiator at Knight Frank in Hong Kong, admits attendance at these shows is not what it once was.

“Purchasing is not as high as two to three years ago,” he says. While he once had about 40 inquiries a day at property shows, that is now down to about 20, he adds.

Developers — which often need to sell off-plan to secure finance — have already begun offering discounts in the over-£1m price bracket, mainly by paying stamp duty. This amounts to a 4.4 per cent reduction on a £1m home and a 7.7 per cent discount on one priced at £2m.

The luxury apartments gold rush took place in other global cities as well, but London has outstripped the competition. In 2009 London, Hong Kong and Manhattan were selling between 1,700 and 2,500 apartments in the $2m to $5m bracket each year. By 2014 London’s total had shot up to 6,250 while the other two cities remained at about the same level, according to figures from Knight Frank.

“They were buying in London in huge numbers because that’s where the capital gains could be made at the time,” says Henry Pryor, a central London estate agent.

Hundreds of apartments in luxury developments that are not even built are already being resold on property portals.

The latest slowdown has brought back memories of the 2008 financial crisis, when an investor-driven frenzy for new UK city-centre flats was followed by price falls that far exceeded those in the wider market.

Mr Kotak says this time is different. “Most of the [developers] are better capitalised than in the last cycle, because financing was stricter. But it depends how far prices fall — if we have a modest decline of 10 or 20 per cent then I don’t think we will see wholesale administrations and bankruptcies, but if prices fall beyond that, there is certainly a risk.”

However, he says developers are likely to be forced to slow their pace of building or convert more units into the private rented sector, where there is strong demand and support from institutional capital.

Developers will also face a number of fresh challenges in the coming months. From April buyers of UK properties must pay a 3 per cent surcharge if it is not their first home, even if their other residence is overseas.

Sentiment may also be affected by June’s vote on the UK’s membership in the EU, although weakness in sterling ahead of the referendum could make UK property look more affordable again.

Even so, the situation has not reached crisis point yet.

“No one seems to be panicking yet,” says Mr Scarisbrick. “We are seeing adjustments in prices but not to spectacular levels.”

With ridged sides intended to resemble a cascading waterfall, a 24-foot aquarium and a yoga studio, One57 West 57th Street epitomised New York’s luxury building boom, writes Anna Nicolaou. But after selling half its units in the first six months, and a record $100.5m condos last year, sales have “slowed considerably”, says Andy Gerringer of Marketing Directors, which specialises in luxury property.

“Everyone had this herd mentality, and then you get a glut. A lot of those projects have stalled now. There are only so many people that can afford to buy $20m apartments,” says Mr Gerringer.

In New York as in London, the lure of Asian and Russian money led to the construction of a series of “tall skinny” towers catering for demand among overseas buyers seeking second or third homes.

But sales have slowed from the buying frenzy of 2013 and 2014: in Manhattan 71 homes were sold for between $10m and $20m in 2015, down from 100 in 2014, while 39 homes were sold for more than $20m, compared with 50 the year before, according to RealtyTrac.

One57 is now 80 per cent sold, says Gary Barnett, president of Extell, the tower’s developer.

Michael Stoler of Madison Realty Capital, a property investor, says: “There is no question that developers are worried.”

Banks are “very cautious”, he says, and not looking to finance these deals unless there is a lot of equity, leaving hedge funds and private equity to fund them.

Developers have more skin in the game than in previous building booms, says Mr Gerringer, because they are putting in 30 to 50 per cent equity for a project, compared with 5 to 10 per cent in 2008.

This leaves them vulnerable to an equity wipeout, while mezzanine lenders will fight to preserve their capital, says Mr Gerringer. “Someone will probably go bust, but it’s too early to tell.”