LONDON — It is always the way with bubbles—the mania builds until the precise moment a faint hissing sound is heard. Then all hell breaks loose. Investors start to stampede for the exits, and count themselves lucky if they can get out with the shirts on their backs.
The next big bubble to burst, an increasing number of informed voices are saying, is London’s ‘super-prime’ property market; that is apartments worth over £2m, which are often housed in gleaming new apartment blocks that model themselves on five-star hotels, complete with ‘amenities’ such as wine cellars, a concierge, room-service, screening rooms, dry-cleaning, serviced laundry, housekeeping, squash courts, and swimming pools.
Large numbers of these five-star apartments—along with countless other grand, stucco-fronted town houses in the best parts of Kensington and Chelsea—have been bought by billionaire foreign owners who, rather than live in them, simply use the properties as secure dumps (and, some say, washing machines) for money that they would rather not leave in a bank back home in Greece, Kazakhstan, or Qatar.
These ‘buy-to-leave’ (a pun on the traditional British property investment model of buy-to-let, or rent) property owners have created residential wastelands in some of London’s poshest neighborhoods.
After dark in the picturesque streets and coveted squares around the Kings Road, Kensington High Street and even Notting Hill, it’s like a ghost town these days. There are very few lights on in the windows of marquee buildings like One Hyde Park and The Knightsbridge.
Nobody’s home—except perhaps, the staff. Any family members actually staying in the houses or flats are likely to be students.
It is estimated that £8 billion-worth of residential London property is unused and ‘economically inert’, and the reality is that wealthy British families don’t want to live in Kensington and Chelsea any more. They don’t feel like they belong there. They have moved out to Battersea, Hammersmith, Acton, and Shoreditch.
A report issued this week by Kay & Co, a high-end London estate agent, claimed that there are now some 4,000 of these luxury apartments, 1,083 of which they say are ‘5-star rated’—meaning the building provides a concierge, gardens, a gym or spa, a cinema, a wine cellar, and a swimming pool—located across eight Central London districts.
Prices paid for new build apartments in Prime Central London (PCL, to use the business jargon) have increased at an astonishing rate.
The average price of a five-star apartment in PCL has more than tripled from £511,000 in 2009 to £2.25 million today, Kay & Co say.
However, all that might be about to change.
Unsurprisingly, developers are clamoring to build more of the luxurious tower blocks. And they have found a friend in the mayor of London, Boris Johnson, who has been broadly accepting of the buy-to-leave market, and pushed several controversial high-rise apartment developments through London’s often torturous planning process.
The result is predictable: a coming tidal wave of over-supply.
Roarie Scarisbrick, of property consultants Property Vision, told The Daily Beast that an estimated 54,000 apartments priced at more than £1 million are coming to market in the next two years in PCL—but that just 3,900 similarly priced units were bought in 2014.
“Volumes are way down,” he says. “We drilled down into the Land Registry data, and we found that the volume of sales of properties priced at £2m-£3m were down 20%, properties priced at £3m-£5m were down 25% and volumes of properties over £10m sold were down 40%. And 2014 was in some ways an atypical year because there was a general election.”
Indeed, some experts have argued that the threat of a so-called mansion tax which dominated much of the electioneering in 2014 makes 2013 a more valid year for comparison, against which PCL sales volumes are more than 60% down, according to another London real estate agency, Douglas Newman Good.
The mansion tax didn’t happen, as the right-wing Conservative party won the election, but foreign investors have instead been spooked by a new property tax regime in the UK which has seen a higher 10% ‘stamp duty’ tax now applied to properties worth over £925,000—and a 12% rate slapped on houses sold for over £1.5m.
There is also a massive disconnect in London now between the price of property and the price of shelter—or, to put it another way, the yields available to investors.
This is a classic warning sign of a bubble, as it indicates that buyers are simply buying things in the hope that the price someone else will be prepared to pay for their lovely tulip will continue to rise, instead of really thinking about the fundamentals.
Astonishingly, Scarisbrick says, some of the new, flash apartments coming on stream in London in places like the redeveloped Battersea Power Station could yield a return of as little as half a percent on the capital invested. Even for landlords accustomed to a return of 3-4%, that could be a little hard to stomach.
It’s easy enough to find dissenting voices in the London property market. Many agents will tell you that their foreign investors simply are not concerned about yields, and that the chaos in the oil and commodity markets, while reducing the average oligarch’s net wealth, will actually encourage yet more investment in the ‘safe haven’ of London property.
Maybe that’s so, and the creators of Singaporean and Hong Kong banking fortunes will continue to merrily buy off-plan for years to come.
But to the locals, listening perhaps a little more carefully, the PCL market is starting to make something awfully like a hissing sound.