Residential Rent Rises Are The Big ‘World City’ Story As Price Rises Outperform Capital Growth
Rental price growth outpaced capital growth in second half of 2011 at +2.3% compared to +1.0%
New world residential rental growth slows (+1.8%) as old world markets accelerate (+2.8%)
Paris overtakes London to become most expensive rental market; Shanghai/Mumbai the cheapest
Highest yields in mature markets – highest is New York (6.9%), lowest Shanghai (2.3%)
Costs of buying can equate to over 4 years’ worth of rent (Mumbai and Shanghai), or around a year or less (London and Moscow)
Rental values are rising faster than underlying house prices in many of the world’s leading cities as demand from domestic and international corporate tenants in an increasingly supply-constrained global residential real estate market, with Paris now the most expensive city for tenants.
The Savills World Class Cities Index recorded an average rental rise of 2.3 per cent in the second half of 2011, compared to a rise of just 1% for capital values, with values in the ‘old world’ markets outperforming the ‘new world’ destinations with a 2.8 per cent increase compared to 1.8 per cent.
Paris leapfrogged London to become the most expensive capital in which to rent accommodation for a basic ‘executive unit’ of staff, with rents now more than three times the price of Shanghai and Mumbai. The star performer in the index was New York, with rental values rising 6.5 per cent in the first half of 2011 and a further 6.2 per cent in the second half of the year.
The majority of new world cities saw reduced rental growth in the second half of the year. The notable exception was Singapore, where rental values rose by 4.4 per cent in the first half of 2011 and a further 5.0 per cent in the second half of the year. Here, the introduction of additional stamp duty for overseas buyers in December 2011 is likely to further benefit the rental market. By contrast, other new world cities – notably Hong Kong, Moscow, Shanghai – saw rental growth slip in the second half of 2011.
“Rental levels are an indication of healthy market fundamentals in terms of occupier demand, and by this measure the markets of Paris, London, Hong Kong and New York look sound,” says Yolande Barnes, head of Savills residential research. “The strong occupier demand in these cities and the relatively low capital values of Paris, London and New York (particularly when compared to Hong Kong) make them look fairly valued for investors – especially New York which ranks among the cheapest world class cities to buy.”
To rent or to buy?
Savills research has also analysed the costs of buying property in the world’s 10 leading global cities. Their analysis reveals that in Shanghai and Mumbai the costs of buying and occupying are so high in relation to relatively low rents that they equate to over four years of rental costs. In Singapore, the figure is around three years.
“Demand for owner-occupation in these markets is likely to fall at times when little or no capital growth is expected,” says Barnes. “The result will no doubt be that the oriental new economies will become low-yielding, high volatility markets where the challenge will be to meet tenant demand to investor appetite for bringing forward supply.”
By contrast it takes just over six months renting in Moscow to cover the costs of buying in the city, and just over a year in London. Along with Sydney these are markets where it may be more cost effective to buy than to rent.
“A key driver of rents in all our world class cities is corporate demand which can have a short term perspective. Uncertainty surrounding the global economy and job security is leading more corporate employees, who might previously have bought, to rent.
“We expect rent rises and high occupier demand to spur investor activity, as has already been seen in London, and for yields to move out in most of the locations monitored in our World Class index.”