London Houses for Rent

With the crisis that started in sub-prime mortgages now wreaking havoc on credit, equity and commodity markets and bringing down banks across the US and Europe, the world’s financial centres are bracing themselves for another kind of fallout – this time in prime residential property.

It’s still too early to gauge what the long-term effects will be and analysts warn that each city will respond differently but, anecdotally, sales of centrally located, high-end houses and apartments are slowing, while prices are stagnant or slipping. Estate agents from London to New York, Zurich to Singapore say this can only be exacerbated by the past few weeks of turmoil.

“They say when Wall Street sneezes, the rest of the financial world catches cold,” says Danny C.Y. Leung, a specialist in luxury condominium sales in Hong Kong. “We’re seeing a similar phenomenon in real estate, particularly on the sale of expensive properties.”

Financial centres historically weather economic storms better than most because they tend to be hubs for media, culture and tourism. But, by almost any measure, these are extraordinary times. “You’re seeing an unprecedented sell-off of securities and a series of shocking bank failures,” says Charles Wyplosz, an economics professor at the Graduate Institute in Geneva. “We are almost certain to see these factors affect property sales and investment, particularly among wealthy individuals.”

Following the collapse of Bear Stearns and Lehman Brothers, two historic Wall Street institutions, and the looming belt-tightening in those banks that remain, New York City brokers are perhaps the most concerned. After years of resilience, the market is ­softening, with third-quarter sales volumes down 24 per cent from 2007, says veteran property appraiser Jonathan Miller of Miller Samuel. The average price of a Manhattan apartment sold in the same period was $1.5m, according to Prudential Douglas Elliman, which was higher than in 2007 but down slightly from the $1.7m average achieved in the first quarter. And prices for new-build condos have started to drop – by 1.5 per cent year-on-year. Listings have meanwhile jumped to more than 10,000, according to estate agency Corcoran Group. And, as Miller notes ominously, the full impact of the banking crisis has not yet shown up in the data.

Many of the properties languishing on the market are in less bankable neighbourhoods and buildings constructed when speculative investment seemed like a good idea. At 20 Exchange Place, a recently completed 57-storey tower, sluggish sales have forced the developer to market the flats as rental apartments rather than condominiums. The company is also offering to waive brokers’ fees, security deposits and the first month’s rent in order to woo tenants. “Developers are being squeezed right now as the market shrinks and that’s forcing them to go to extraordinary lengths to fill units,” Miller says.

Individual sellers in the city’s priciest ­re-sale postcodes have started getting jittery in the past few weeks as well. Eugenia Foxworth, a broker with Warburg Realty Partnership, says clients have cut asking prices on seven of her 18 exclusive Upper East Side listings. Several others have pulled their homes off the market, hoping to ride out the economic slide. “The market for trophy properties will lose a little luster with current conditions,” she says. “Buyers and sellers have been put in a wait-and-see mode until they are sure the market will rebound.”

Leung says the same is true in Asia’s financial capital. Fears of rising interest rates, higher unemployment and a slowing economy have caused analysts to predict that Hong Kong house prices will drop by 10 per cent or more in the fourth quarter. Transaction volumes are down 60 per cent from last November’s levels, according to Knight Frank, and, although prices for the most luxurious properties in The Peak were still up year-on-year to HK$24,700 per sq ft in August they are now falling a bit each month. Rents are meanwhile being slashed – by 15 per cent for one development in the Mid-Levels. And, according to a survey by the Centaline Property Agency, thousands of estate agents are expected to leave the business in the next six months.

The London market is also faltering after a decade-long boom and the situation has only been exacerbated by the crisis hitting the City and Canary Wharf. An estimate by the Hay Group management consultants suggests financial and business services companies in the UK expect to shed 110,000 jobs in the year to next April, while those who do stay employed could see bonuses severely reduced.

As a result, property analysts are predicting that house prices will tumble at least 20-25 per cent from their peak. Gazundering – where buyers demand discounts as high as 30 per cent before signing contracts – is rife. And even estate agents in posh areas such as Kensington, Chelsea, Fulham and St John’s Wood say business has dropped significantly.

“We had more than 2,500 viewings in September and that’s a lot of traffic but now most people are sitting on their hands, watching and waiting,” says Lindsay Cuthill, a director at estate agency Savills. This week he received a “good offer” of £3m on a Fulham property. But that was £250,000 below the asking price and, generally, he says, “the £1m-£3m market – investment banker territory – is on hold”.

London’s super-prime market is said to be showing ‘early cracks’
According to Savills’ research department, turnover of homes worth £5m-£10m is also down – by a third in the first three quarters of this year compared to 2007 – while average prices in popular central London neighbourhoods have fallen by 12.1 per cent this year. And even the so-called super-prime market, which had been booming with billionaire buyers from Russia and the Middle East, is showing some “early cracks”, with prices down 1.8 per cent in the third quarter.

Eliza Leigh at Knight Frank paints a similar picture. “This financial crisis means we’re approaching a sustained period of slow growth. And we haven’t the foggiest idea how long it will last.”

The week Lehman collapsed, she dealt with one buyer who cited the market turmoil to secure a discount on a £2.9m Kensington flat. “He made a compelling argument that the whole financial situation had changed [and] I think the sellers were extremely worried that they wouldn’t be able to find another secure buyer with market conditions so perilous.”

Forecasting how the New York, Hong Kong or London property markets will perform in coming months is perhaps a fool’s game. As Savills’ Jonathan Hewlett says: “We’re dealing with the unknown.”

But Cuthill is fatalistic. “I was out last week with a client from Morgan Stanley and his wife, who is pregnant. And he said: ‘If my bank is still standing, and I still have a job and I still get a bonus, we’re still going to buy a house.’ People can only put their lives on hold for so long.”

End of Part I

Article written by By Troy McMullen

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