Bonus cuts may slow property rebound

Britain's curb on banking bonuses may stunt the recovery in London's luxury housing market by wiping out the windfalls that let buyers afford big mortgages, according to property brokers Knight Frank and Savills.

Bankers and financial-services executives are just starting to buy property again after a year of price declines ended in March. They already account for a smaller proportion of buyers than at the peak of the market, said Liam Bailey, head of residential research at London-based Knight Frank.

"If you take bonuses out of the equation, prices can't rise as quickly and they will take much longer to return to peak levels," Bailey said.

Knight Frank and Savills are the biggest brokers for London houses and apartments costing more than £1 million ($2.2 million).

The UK's five largest banks agreed two days ago to impose limits on bonuses, following guidelines set by the Group of 20 nations at their summit in Pittsburgh last week. Financial companies have cut thousands of jobs in London in the global recession, contributing to a slump in luxury-home prices in districts such as Mayfair and Chelsea.

Since March, property values in the most expensive areas have fallen at a slower annual pace, Knight Frank estimates. They started to increase on a monthly basis in April and gained 1.3 per cent last month. Prices are still 18 per cent below their peak.

The market's improvement is being driven by a scarcity of properties, rather than more purchasers, according to Savills, which is also based in London.

The number of homes for sale is about 25 per cent less than the average for the past five years, the broker estimates. Finance-industry workers accounted for 32 per cent of luxury-home buyers during the past six months, up from less than 30 per cent at the start of the year, Bailey said.

That compared with about 40 per cent at the market's peak in 2007.

"Going forward, the bonus equation will be pretty important," Savills Research Director Lucian Cook said. "It might take some of the heat out of the top of the market."

Alistair Darling, the Chancellor of the Exchequer, met executives from HSBC, Barclays, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered to sign up to the G20 principles, the Treasury said. The rules restrict the amount the lenders can devote to their bonus pools and how much they can set aside for deferred payments to executives and traders.

The level of annual bonus payments is closely correlated with movements in the prices of the best properties in central London, Cook said. Even so, the effect of the new rules may be damped by salary increases awarded to bankers to avoid a drop in compensation, he said. That could let them afford larger mortgages.

"The curb on bonuses will result in there being less competition," said Camilla Dell, managing partner of Black Brick Property Solutions, which helps wealthy individuals find homes in the UK capital. "Price rises are bound to be lower if you cut off a large chunk of the buyers."

Not all bank employees face the prospect of lower bonuses. Goldman Sachs Group set aside a record US$11.4 billion ($16 billion) to pay compensation in the first six months of this year. The securities firm has already limited guaranteed bonuses to one year and is paying a larger share in stock as amounts increase.

The pound's weakness is making London properties more affordable for overseas buyers. Sterling has fallen 28 per cent against the US dollar since the height of the boom and dropped 25 per cent against the euro.

In dollar terms, prices for prime London properties were about 50 per cent cheaper in March than two years earlier, Bailey said.

- BLOOMBERG