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Taxes, Global Economic Woes to Take Toll on London Property Prices

Slowing investor appetite to hit the high-end new-build market

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Workers excavate footings during construction work at Clarges Mayfair, a luxury development by British Land Co. on Clarges Street in Central London’s swanky Mayfair district.

JASON ALDEN/BLOOMBERG NEWS
Workers excavate footings during construction work at Clarges Mayfair, a luxury development by British Land Co. on Clarges Street in Central London’s swanky Mayfair district.
JASON ALDEN/BLOOMBERG NEWS

Prices of new-build homes in central London are expected to fall this year, a sign of weakening demand for high-end developments around the U.K. capital. Homes prices in new developments will drop 3% in 2016, according to real-estate broker JLL. In November, JLL said it expected prices to rise 1% this year. The drop in prices stems from shrinking demand from global investors who are contending with stock-market shocks, a collapse in oil prices, and an impending U.K. tax hike on landlords and second-home owners. These factors are “forcing JLL to reconsider price growth forecasts,” the broker said.

Central London property became one of the hottest global assets after the 2008 financial crisis, driven in part by a surge of demand from wealthy overseas buyers. Last year, prices for high-end homes in prime locations fell amid weakened demand from global investors. This year slowing investor appetite will hit the high-end new-build market, JLL said. After prices fall this year, they are expected to remain flat in 2017. Over the longer term, JLL said that the broad residential London market remains underpinned by a growing U.K. economy, strong employment levels, and expectations that the Bank of England will keep interest rates low. It said prices would likely rise again in 2018 as a result. The viability of some new developments will be directly affected by the weaker demand, JLL said. New-build development relies on selling apartments to investors before construction starts, as it allows the companies to generate cash and open up financing options. From April, the so-called stamp duty charge for landlords and second-home buyers will rise by 3% of the sale price. The U.K. government announced the change last November. With investors balking at the new tax, the government “has directly undermined its own priority to boost housing supply,” said Andrew Frost, head of residential at JLL. “Furthermore, the change has made higher-density schemes demonstrably more risky.” Outside central London, demand for new residential development is expected to remain stronger, JLL said. In these areas, prices are expected “to remain broadly flat, provided that developers adjust expectations to suit this new market condition,” said Adam Challis, head of residential research at JLL, in a statement. The average London house price was £530,409 in January, up nearly 14% from a year earlier, according to the Land Registry. Write to Art Patnaude at art.patnaude@wsj.com This article originally appeared on The Wall Street Journal.