Derwent London Plc has shelved plans to turn an office building on Savile Row in London’s Mayfair district into 29 luxury apartments after demand was damped when the government raised the sales tax on the most expensive properties.

Soaring prices for luxury homes encouraged developers to seek to turn office space into 16,600 new homes in greater London in the two years through May 2015. The higher sales tax has made it more difficult for developers to sell the costliest apartments and is causing investors like Derwent to reassess high-end home plans.

“Savile Row is a story of stamp duty and construction costs,” Derwent Chief Executive Officer John Burns said by phone on Thursday. “We saw the new stamp-duty regime come in and construction costs rise and we decided to stay in the building and do a rolling refurbishment of the offices.” Derwent develops mid-priced office space in central London.

Demand for London homes under construction slumped by 19 percent in the fourth quarter ahead of a sales-tax increase for landlords and second-home buyers in April. The stamp-duty sales tax will climb to as much as 15 percent of the costliest homes for landlords and second-home owners, and add 90,000 pounds to the levy on a 3 million-pound apartment. The higher charge follows an increase for all buyers of luxury homes in 2014.

Sales in the second phase of Capital & Counties Properties Plc’s Lillie Square project in the Earls Court district, where a two-bedroom apartment can cost 1.7 million pounds, haven’t risen since November, the company said on Wednesday.

“The challenging conditions seen in the residential market at the end of the year are expected to continue in 2016,” the developer’s CEO, Ian Hawksworth, said in a statement on Wednesday.

‘Numerous Advertisements’

“We are concerned by the significantly slower sales rates at Earls Court,” James Carswell, an analyst at broker Peel Hunt with a reduce rating on the stock, said in a note to clients. “This is despite numerous advertisements offering to pay stamp duty on behalf of the buyer and, although prices have held up so far, we remain cautious.”

In south London’s Nine Elms, the district that includes Battersea Power Station, there is “a messy shoot-out between competing developers” for buyers in a neighborhood where 18,000 homes are planned, according to Mike Prew, an analyst at Jefferies Group LLC.

Tax increases hurt sales in the latest phase of the Battersea Power Station, according to Sime Darby Group, which owns 40 percent of the project. While 53 percent of homes in phase 3a have been sold, those priced above 1.5 million pounds remain on the market, the Malaysian company’s CEO, Mohd Bakke Salleh, said on Wednesday.

Buyers from Russian and China are purchasing fewer apartments in London, Bakke said.

Explore Housing Prices in London

Barratt Developments Plc sold homes at a project in Horseferry Road in the Pimlico district at a rate of two to three a week in 2014, CEO David Thomas said by phone on Wednesday. In a new project opposite that development, sales are running at less than one a week, he said.

“We are still seeing transactions at a higher price point, but it is definitely at a slower rate of sale,” Thomas said.

The number of homes under construction in London rose by more than a third during 2015 to a record 60,300, according to data compiled by researcher Molior London Ltd. (Bloomberg)