Luxury-home prices in London rose last month at the slowest pace since July 2005

Luxury-home prices in London rose last month at the slowest pace since July 2005 as the prospect of job cuts and smaller bonuses deterred investment bankers and other buyers, Knight Frank LLC said.

The average price of houses and apartments costing at least £2.5 million (S$7.55 million) increased 0.3 per cent in October from the previous month, according to an index compiled by the London-based property broker. Prices gained about 34 per cent from a year earlier.

Companies in the City of London financial district may cut 6,500 jobs and reduce bonuses by 16 per cent this year, the Centre for Economic and Business Research said on Oct 8. For the past two years, most of the bonuses have been spent on real estate, fuelling demand for apartments in London neighbourhoods such as Chelsea, Kensington and Notting Hill.

‘The impact of the credit crunch and a weaker City economy have contributed to a more sober market,’ said Liam Bailey, head of residential research at the London-based firm.

Bonus-earners in the city will invest only £2 billion in homes next year, compared with £5.5 billion this year, as they seek assets that offer higher returns, according to Savills plc estimates. Savills and Knight Frank are the biggest brokers for prime London properties, the most expensive in the world.

The lack of investment will restrict the gain in luxury-home prices to 3 per cent in 2008, less than a tenth of this year’s rate, Knight Frank forecast this week. The company cut its estimate from 10 per cent.

For homes costing more than £5 million, the average price increase will probably be about 8 per cent next year compared with the estimated 2007 gain of 34 per cent, Knight Frank said. The main customers for the most expensive houses and apartment are wealthy investors from Russia and the Middle East, according to the broker.

The contrast with the rest of the London market ‘illustrates the strength of the super-prime market with demand from international buyers remaining very strong,’ Mr Bailey said. — Bloomberg

Source : Business Times - 7 Nov 2007