DEVELOPERS of prime London homes, the best-performing properties in the UK since 2009, risk being squeezed by spiralling land prices and building costs as the luxury market cools.
"The biggest risk for developers is overpaying for a site based on the assumption that sales values in two or three years' time will be rising," said Mark Farmer, head of residential at consulting firm EC Harris. "That's a very dangerous game to play. More importantly, they need to be factoring in construction-price inflation."
Investors betting on the boom continuing pushed up residential-land prices in the best London areas by almost 14 per cent in the year through September, according to Knight Frank.
Now, with a stronger pound making UK assets more expensive for foreign investors and even billionaires starting to balk at the prices being sought, signs of a slowdown are emerging. Prime home values rose 6.8 per cent in the year through October, the least in four years, the broker estimates.
Farmer predicts the cost of building a home in London will rise about 5 per cent this year and as much as 6 per cent in 2014.
Builders may also find themselves with losses on land purchases should interest rates rise, according to Alexander Michaelides, a finance professor at London's Imperial College.
With the economy gaining momentum, Bank of England policy makers projected last week that the benchmark rate could rise from a record-low 0.5pc in 2015, a year earlier than previously thought.
The debt crisis in the euro region, uprisings across North Africa and political uncertainty in Russia have made London property a haven for wealthy foreigners in recent years, spurring demand from companies for a limited number of sites.
Homebuilders are facing "stiff competition from those already in the market, as well as new international entrants, such as mainland Chinese developers", according to Grainne Gilmore, Knight Frank's head of UK residential research.
Deals in London this month include Hong Kong developer Knight Dragon taking full control of a site for as many as 10,000 homes in Greenwich and Singapore-based Oxley Holdings Ltd's purchase of a 40-acre site for 3,400 homes on the banks of the River Thames.
Two-thirds of new London homes sold before completion are being purchased by Southeast Asian buyers, according to Land Securities, the largest UK real-estate investment trust.
Home values fell in some areas of central London in October, according to Knight Frank. They dropped 1.4 per cent monthly in the South Bank area, where Canary Wharf Group and Qatari Diar Real Estate are planning to build apartments and offices.
Home prices in the borough of Westminster, which includes the affluent Mayfair and St James's districts, fell for a fourth consecutive month in September to an average of £1.1m. Home values in London rose 9.3 per cent in the year through September, according to the Land Registry. (Bloomberg)