Developers eyeing luxury London homes are 'late to the party'

LONDON Wed Jul 11, 2012 4:13pm BST

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LONDON (Reuters) - Developers of offices and shops in search of bigger profits in London's red-hot luxury housing market may have missed the boat, after a huge surge in values since 2009 showed signs of easing, property experts said.

British Land, whose portfolio comprises mainly offices and shops, is reportedly in talks to buy a 200,000 square foot block in London's Mayfair district that has permission to be developed into luxury homes and offices, for more than 150 million pounds ($232 million).

Other commercial developers that have stepped up their residential schemes include Land Securities, which is building over 200 homes in the Victoria district, and Derwent London which is turning an office building next to London's Hyde Park Corner into an hotel, luxury flats and offices with Grosvenor Group.

British Land declined to comment on the reports.

"Developers may be coming late to the party," Michael Marx, chief executive of Development Securities, told Reuters. "How long does a good thing last? You can chase a market up and up but eventually it will stop."

The boss of a London residential developer who declined to be named said: "It's becoming a more crowded marketplace with commercial developers but by the time you've spotted a bandwagon, it's probably because it's too late."

Prices for luxury London homes have surged in recent years as economic turmoil in Europe and political uprisings across North Africa and the Middle East have driven investors to London in search of a safe haven.

There are signs of a slowdown after the British government said in March it would clamp down on tax avoidance by overseas buyers of homes costing more than two million pounds.

Prices for the best homes rose by their slowest rate in nine months in May, though values have increased 48.4 percent over the past three years, data from property consultant Knight Frank shows.

The strong performance contrasts with lacklustre demand for space in the UK's office and retail property sectors due to the weak economic outlook.

"Prime residential is a market that is sitting up and begging to be bet on, but you only know whether you have done a good deal in three or four years time," said Marx.

"The value of offices is about 600 pounds per square foot. Prime residential could sell for about three times more," Peel Hunt analyst, Kate Barlow, told Reuters.

Developers including the Duke of Westminster's property company Grosvenor Group, have converted offices in London's most exclusive neighbourhoods back to their original use as homes to cash in.

Some property analysts welcomed the fact developers were branching out.

"Whether it's a bit too late, time will tell," said JPMorgan Cazenove analyst Harm Meijer. "But from overall asset allocation point of view it makes sense to have some exposure to the residential market and keep their toes in the water."

Tony Pidgley, chairman of London residential specialist Berkeley Group, said commercial developers would pick up a limited amount of residential deals though he declined to comment on their timing.

"The best time was obviously just after Lehman Brothers collapsed, when we stuck 300 million pounds into the market," he said. ($1 = 0.6454 British pounds)

(Editing by David Cowell)

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