Russians Score as London Property Falls

ENLARGE

There are 16,947 new homes under construction in London due to be finished this year through 2018, according to construction consultancy Arcadis. Photo: Reuters

LONDON—In the midst of a property boom in 2013, a Russian investor made a down payment on a £1 million ($1.3 million), one-bedroom condominium being built near the River Thames.

The Moscow-based investor recently sold the condo in One Tower Bridge for about 5% less than he originally paid, according to a person familiar with the sale, a signal that demand for luxury London property has slipped from its peak in 2014.

But the investor still went away happy, reaping a 14% profit after converting sterling from the sale of the unbuilt unit into rubles, the broker said.

Sterling fell against the ruble after the U.K. voted to leave the European Union. But the pound is still worth around 40% more against the ruble than it was in July 2014, meaning Russians who bought into high-end developments during the boom are able to make a decent profit even when, in sterling terms, they are selling at a loss.

Foreign investors from Russia, China and the Middle East were cornerstones of the luxury-condo building boom that is still sweeping through this city. There are 16,947 new homes under construction in London due to be finished this year through 2018, according to construction consultancy Arcadis. ARCAY 16.96 %

The proliferation of cranes towering over expensive developments that relied heavily on overseas investors has stirred concerns, with property investors and analysts highlighting the sector as one of the most likely to face a downturn after Brexit.

Demand for unbuilt luxury condos soared after the financial crisis. Prices rose 9.6% a year between 2010 and 2014, according to property-data firm Lonres. The rising prices helped fuel further demand. Property developers responded with more high-end projects.

But demand has slackened. The average resale price for unbuilt condos is down around 10% from 2014, according to Lonres.

“It’s undeniable that we have a challenging sales market at the moment,” said Neil Chegwidden, a researcher at property broker JLL, speaking at a development seminar last week.

Buying condos years before they are finished typically requires a down payment of 10% to 30%. The bulk of the payment is then due when the developer hands over the keys to the front door.

For Russian investors that paid deposits during the boom, a weakened ruble and multiyear economic downturn means some “are finding it more difficult to find the funds to complete,” said George Shishkovsky, who runs a property-buying firm LondonDom.

Selling before the rest is due has become a lucrative option, according property brokers.

One wealthy Russian couple who own a construction business are currently trying to sell a condo in a development called Fulham Reach, west of central London along the Thames. They paid a 20% deposit, or £700,000, for a £3.5 million condo in January 2014, according to a property broker.

ENLARGE

The rest of the price, £2.8 million, is due to the developer, Berkeley Group PLC, BKG 2.95 % within the next couple of months, the broker said. That amount, once seemingly achievable when business was going well, has since become too high, he said.

The couple plan to sell the contract at a loss to put the capital back into their business at home. Any profit due to the exchange rate, while welcome, wasn’t part of the investment strategy. “Ideally they want their £700,000 back, but it’s now a distressed sale, so that won’t happen,” the broker said.

The lending environment for Russians has also become more difficult. U.K. banks generally won’t lend to Russian investors, and while foreign banks will, they typically won’t provide a big enough mortgage to cover the final payment.

Russians who put down deposits “still need a lot more cash, so it’s very difficult for them,” said Roman Grigoriev, owner of Longrad, a London property buying brokerage.

To be sure, while the luxury-condo market is weaker, experts say it is also supported by factors such as a weaker pound, increasing demand among foreign investors, and that some of the biggest projects are backed by long-term investors.

And, for many investors, including Russians, the attraction of London has hardly waned, with the city’s property perceived as a far safer investment than back at home.

“While we haven’t got people jumping into the market to buy, people aren’t rushing to sell, either,” said Marc von Grundherr, lettings director at Benham & Reeves Residential Lettings.

One of his Russian clients has friends opting to sell at the beneficial sterling-to-ruble exchange rate, but he is holding on. London property is “his security blanket,” Mr. Von Grundherr said.

Write to Art Patnaude at [email protected]