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London prime property gains may slow to 12% next year

The value of London's most expensive apartments and houses may increase by about 12% in 2007, about 50% less than this year, as borrowing costs in Europe increase Knight Frank said.

The price of homes in London costing more than £5 million ($9.4 million) will climb 25% this year, London-based Knight Frank said in an e-mailed report published yesterday. UK prices will rise 6% next year, down from 9% in 2006, international real estate advisers Knight Frank LLC said. „This year's bonus round for bankers, traders and fund managers may be the key,” Liam Bailey, the head of residential research at Knight Frank, said in an interview. „That is the main driver for prime property prices.” Bonuses paid to employees of London-based financial firms may rise at least 8% from 2005's record £7.5 billion, the Centre for Economics and Business Research said last month. Demand, coupled with a shortage of properties for sale, has resulted in prime London prices rising at their fastest rate since 1997. Prime central London properties have been the best investment since the deregulation of London's financial markets, known as the City of London, 20 years ago this week, Bailey said. They have surged 404% over the period, compared with a 278% jump in the benchmark FTSE 100 Index and a 48% gain in the price of gold.

„The reforms in the City not only cemented its position, but also led to the rise of serious wealth from an already wealthy source,” Bailey said. „The real impact of this growing wealth has been on property prices and demand for property in the center of London. London's market has become supercharged in recent months, with the most recent wave of hedge-fund wealth adding to the competition for property.” Prices in the best streets in Chelsea, a favorite with bankers, have risen by almost 30% in the past year as the number of people looking to buy expensive homes in central London more than doubled in the period, said Knight Frank. The biggest gains next year in the UK outside the prime London market will be in Northern Ireland and Scotland, which have also been the best performers this year, Knight Frank said. There will also be an impact on prime regional markets close to London as cash-rich London-based buyers compete with locals for the best properties, Knight Frank said.

Price growth across Europe will slow in 2007 as higher interest rates make homes less affordable. The biggest gains will be in countries in eastern Europe that joined the European Union at the start of 2004, Knight Frank said. „We are upbeat about prospects in 2007,” Bailey said. „With no obvious major international shocks visible at this point in time and a continuing broadly benign economic and interest-rate environment likely, we see both buyer confidence and appetite remaining firm.” House prices in Lithuania may advance 20%, followed by Latvia and Slovenia, where prices may gain 17.5%, Bailey said. Prices in Latvia gained 45% in the year to June 30, Knight Frank said in August. French home-price growth slowed to 9.4% last year from 15%, while Irish prices gained 9.4%, compared with 10.1% the previous year. In both countries prices are set to rise 7.5% next year. The one European country where prices are set to accelerate is Germany, Bailey said. Property prices in Europe's largest economy may advance 2.5% in 2007, which compares with 0.5% in the year to June 30. Germany has one of the lowest rates of home ownership in Europe at 43% and prices fell in 2004 and 2005, according to the European Central Bank. The Knight Frank survey covered 32 countries in continental Europe and Morocco, which is regarded as almost part of Europe by many property buyers, according to Bailey. (Bloomberg)