World city property markets

From residential to commercial, we highlight the key trends that are impacting property markets.

8 April 2014, Words by Paul Tostevin

 
Urban impulse

Creative companies are moving from suburbs into city centres

Across the globe young, footloose, creative people are escaping the suburbs and moving to urban centres. The tech industry is no exception. Silicon Valley may be the world’s premier tech centre, but in recent years Valley firms have sought increasing amounts of space in downtown San Francisco. Wireless systems, the cloud and flexible working practices mean that major conglomerates no longer need huge offices for servers and staff – smaller units are just as viable.

Vibrant, mixed-use communities are at the heart of the new tech industry zeitgeist (see fig.1). The exchange of information and ideas is central to any creative industry, and tech is no exception. Creative clusters allow innovation to thrive. But it is not just innovation within a single company that 
is productive, the innovation of whole industries and the wider creative community makes a difference. This means the human interaction allowed by cities has become a key attraction in the search for workspaces by tech companies. Cafés, bars, shops, a variety of housing and low-cost office space provide the real estate foundation they seek.

While the city trend is shaping tech companies, the tech trend is also shaping cities. In New York, the tech industry is the second biggest employer behind finance and real estate, accounting for a third of private sector job growth since 2007. The growth in the tech industry has gone hand in hand with the city’s urban renaissance (see New York).

Major global players, such as Google or Amazon, sit alongside small start-ups and more established medium-sized firms in newly regenerated locations. These companies are fast growing and seek flexible, non-traditional office space, pushing up rents in creative clusters faster than in more traditional office districts in some locations.

In New York, rents for the space favoured by tech and creative firms are up 33% from 
a December 2010 low, compared to 20% for financial office space. In London, the city’s major landlords are actively profiling their stock to appeal to this growth sector, while Singapore’s ‘shophouses’ are proving attractive to tech start-ups looking for cheaper alternative space and have shown very high rental and capital growth.

Growing tech cities that offer a vibrant, creative urban scene will have a significant advantage in the world city race and should show superior real estate growth.

Figure 1
New money

Ultra-wealthy individuals are transforming investment behaviour

Over half of global big ticket real estate deals are now led by private wealth, such as sovereign wealth funds, private banks, family offices, wealth managers and private offices, rather than public companies and investing institutions.

Real estate currently accounts for around a fifth of the invested wealth of ultra high net worth individuals (UHNWIs) and the use of private equity in major property deals worth at least US$10 million has nearly trebled since 2009. Around 3%, or US$5.3 trillion, of the world’s total real estate value is owned directly by 200,000 of the wealthiest individuals (0.003% of the global population).

These private owners are also very active in real estate that is held indirectly, through private companies and other entities, making them increasingly central to traded investable property. Since the debt crisis they have stepped into the property deals that corporate bankers have deserted.

The willingness of private wealth to take the place of debt finance, or to take a higher-risk development position, is now making the difference between deals done or schemes mothballed. Around 35% of global big ticket deals (US$10 million-plus) in 2012 were only possible because of private funding.

The behaviour of private wealth has the power to transform cities. Different investment criteria mean real estate projects that would not otherwise have been funded by corporate investors may now be possible. Convincing a private individual of a new development or regeneration story may be easier than persuading a corporate investment committee to do something new. At present, the big private investors favour urban real estate. Their preferences and behaviour will shape our global cities and increasingly determine which ones will be called ‘world cities’ in the future.

Dubai has introduced mortgage caps
Cooling medicine

Measures to restrict property speculation bring mixed results

Residential property, an investible asset class in world cities, has attracted huge volumes of domestic and overseas investment. In some cities, the weight of money pressing on these markets means demand outstrips supply, pushing prices out of the reach of many local residents. The response has varied, but some governments have introduced taxes and duties to cool the market.

In Hong Kong and Singapore, the effects of new wealth generated in mainland China have led to the most penal charges – which appear to be working. Non-resident buyers in Hong Kong pay an additional 15% stamp duty. Coupled with the doubling of standard stamp duty in 2013 (8.5% on property over HK$2 million) and duties of between 10% and 20% of purchase price if the property is sold within three years of purchase, Hong Kong property now appears a less enticing investment. A side effect has been to push investors towards cheaper properties, putting pressure on the homes the majority of Hong Kong citizens aspire to own. The biggest effect of the measures has been on transaction volumes in the city’s prime markets, with prices beginning to soften (see Hong Kong).

In Singapore, a 15% duty on overseas buyers also applies. Duties ranging from 4% to 16% of the sale price apply if the property is sold within four years, pushing costs higher still. The city-state has also introduced rules to ensure that a buyer’s monthly payments do not exceed 60% of their income. As in Hong Kong, the impact on transactions has been significant (see Singapore).

These ‘new world’ taxes are under constant scrutiny and can be changed quickly in response to market conditions. In the cities of the West, when introduced, they tend to be more permanent. Sydney has long placed some restrictions on overseas home ownership. In London, the threat of a mansion tax would put the city further up the world cost rankings, but such a tax would have to be penal to rival the costs associated with real estate in Singapore and Hong Kong (current costs are set out in fig. 2).

Cooling measures are not always effective. Shanghai has seen several rounds of market-cooling taxes, along with restrictions on multiple-home ownership. In spite of slowing price growth, appetite for real estate remains unsatisfied and new development continues apace. The introduction of mortgage caps in Dubai is likely to do little in a market fuelled by cash buyers.

Overall, it appears that property taxation does have a suppressing effect. There is strong evidence from Hong Kong and Singapore that transaction numbers are suppressed by the introduction of stamp duty. But it seems likely that the price impact of this is relatively temporary, cooling values while the adjustment to the new tax is being made, but not altering the subsequent long-term trajectory of prices.

Figure 2

 

 
 

Key Contacts

Yolande Barnes

Yolande Barnes

Director
World Research

Savills Margaret Street

+44 (0) 20 7409 8899

 

Paul Tostevin

Paul Tostevin

Associate Director
World Research

Savills Margaret Street

+44 (0) 20 7016 3883

 

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