The Grosvenor Crescent residential housing redevelopment project, a joint venture between Royal Bank of Scotland Group Plc (RBS) and Grosvenor Group Ltd., is seen in London, U.K., on Friday, July 6, 2012. RBS, Britain's largest publicly held lender following its 2008 bailout, is midway through selling 15 residences on Grosvenor Crescent, three years after seizing the properties from an insolvent developer and taking on the unfinished project. Photographer: Simon Dawson/Bloomberg
Grosvenor Crescent in Belgravia, London © Bloomberg

In the latest sign of gloom for the London property market, the owner of swaths of Mayfair and Belgravia has reported a steep drop in returns from its UK portfolio and said it was preparing for an even weaker property market after Brexit.

The Duke of Westminster’s property company, the Grosvenor Group, traces its history back more than 300 years to an estate in London. It has grown to become a global enterprise with real estate holdings worth £6.5bn.

But in its annual results on Tuesday, the company said it had sold off more than £500m of UK assets in the past year, and that the vote to leave the EU last June had especially hurt London residential property.

The company saw total returns from the UK and Ireland fall to 0.3 per cent in 2016, after six years of annual returns of more than 10 per cent. 

The group said it was able to partly compensate for the fall in UK returns with stronger results overseas, owing somewhat to the depreciation of sterling. This helped total returns to reach 8 per cent during the year. 

However, the company said it expected “significantly weaker” returns next year. Mark Preston, chief executive, said that in the UK, the vote to leave the EU last June had led to a “quite significant chilling effect” in the London residential market. 

Grosvenor graphic

“Our view is that the UK can come out perfectly well whether it’s in or out, with a hard or soft Brexit, whatever you want to call it, but the problem we have is a period of great uncertainty, which could be quite prolonged. 

“Our plea would be for the UK government to recognise the need for expediency in reaching a new agreement and not allowing this to drag on and on.” 

He added: “Central bank policies around the world have resulted in property and other heavy assets rising steeply in recent years, and that means property is really quite vulnerable to what we think is going to come next in the cycle, which is interest rates rising. Overall that gives a global note of caution to future returns from property.” 

Rising interest rates tend to increase bond yields, which means investors look for higher yields from property, pushing prices down. 

Grosvenor Group, which owns 300 acres of Mayfair and Belgravia, sold off £1bn of property assets in 2016, including £557m of sales in the UK, with a view to investing the proceeds in developments in the next property cycle. Mr Preston says the sales included high-end London homes as the group anticipated a further decline in that market. 

Despite its history of owning and running some of London’s most expensive streets, Grosvenor is now pushing into “mid-market” housing, including a flagship development in Bermondsey, south of the Thames river, which will include about 1,500 homes, mainly for rent.

The group generated £79.2m of revenue profit, a measure that strips out property price movements, in 2016, slightly lower than the previous year. It said it planned to allocate another £50m to Asian real estate this year, in a continuing bid to diversify its holdings. 

The Grosvenor Group, part of the Grosvenor estate, is one of the UK’s largest private property portfolios. It is owned by the Grosvenor family, now headed by 26-year-old Hugh, who became Duke of Westminster last year after the sudden death of his father, Gerald Cavendish Grosvenor.

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