World Residential Markets

World Residential Markets
 
Major Trends For International Investors

7 September 2015, by Yolande Barnes

International investors will do well to look outside of the prime markets in major cities. We suggest some alternatives.

 

What strategies do international investors need to adopt to take advantage of the way the world is going? We pick three major trends that we think will be important for the next decade or so.


  The rise of secondary

  Growth of second-tier cities

■  Rise of resorts

Prime or secondary?

In the world of global real estate investing, the prime residential markets in first-tier cities around the globe have taken the brunt of buyer interest for the last decade or so. The growing importance of private wealth in the sector, particularly after 2008, has meant that capital has been concentrated beyond the realm of institutional, commercial property owners. This means it has increasingly been focused on residential but it has still landed in many of the same locations previously favoured by the corporate investor.

The focus on first-tier cities and on the prime, central locations of these cities has partly been a result of global urbanisation and the focus by people of the world on city living. In Asia, the top cities are very often the only places where grade A investable new stock can be found.

In European, American and other ‘old world’ developed cities though, the choice of stock is less limited but still investment is concentrated in the more prominent and best-known sectors. These have very often been considered as ‘safe havens’ for capital.

"The leisure industry in Asia is nascent and fast growing. It will yield new investment opportunities in regional resorts"

Yolande Barnes, Savills World Research

Looking at the handful of most-invested international cities, it is also noticeable that cross-border wealth and other investment has been concentrated in the prime core, rather than the equally investable secondary stock of more outlying districts and lower grade buildings. Sometimes it is a result of investor psychology, sticking to the famous or familiar, particularly in new and unfamiliar marketplaces. In other cases though, it directly reflects the lending policies of many financial institutions which help fund, finance or gear the purchases of private individuals. This re-imposes the corporate view on the private investor.

The impact of this seems to have been to push prime prices significantly higher than mainstream property prices in certain cities. Residential property price growth in major global cities illustrates very well what has happened to prime real estate in the most sought-after urban centres. Between 2005 and 2014, price growth for prime residential properties was high, averaging a total of 67% across all our studied world cities. This growth compares with 50% for ‘mainstream’ properties in the same cities.

In the most heavily invested cities like Hong Kong, London and Singapore, the effect has been even more extreme. In these key cities, growth has reached up to 140% in prime markets within the 10-year period.

This illustrates how a gap has opened up between prime and secondary real estate and how it is particularly pronounced in markets where there is the biggest differences in purchasing power between cash-rich prime investors and borrowing-reliant or renter-occupied secondary markets. The effect of this is most marked in the most globalised residential markets but seems to result in more expensive property for the wealthy, not for all occupiers.

Hong Kong is a very good example of this, where typical prime prices are ten times the level of secondary or Paris where wealthier owners are paying eight times the price that administrative employees would pay for their accommodation in the city.

By contrast, New York, other US cities and Sydney, where all purchasers are generally more domestic in origin, the multiple of prime property to mainstream is much lower – meaning that property is equally expensive for both CEOs and administrative workers.

FIGURE 11

Prime residential property growth in four world cities

 
Figure 11

Source: Savills World Research

 

 
Cross border wealth and other investment has been concentrated in the prime core of first-tier cities

Mainstream to prime ratio

Figure 12 shows which world cities show the greatest differences in price between their prime markets (occupied by CEOs and directors) and secondary markets (occupied by admin and other staff). It shows that those where the difference is greatest are not necessarily the most expensive markets in US $ terms (although Hong Kong is). It also shows that some cities have secondary markets that are very expensive by international comparison (e.g. Singapore and New York) even though their prime markets are not.

Broadly, in the more domestically invested markets of the USA, Japan and Australia, prime property looks relatively cheap compared to secondary, while in the more internationally invested markets of Hong Kong, Paris, Dubai, London and Singapore, secondary property looks relatively cheap compared to prime.

FIGURE 12

Prime and secondary values

 
Figure 12

Source: Savills World Research

So, have the prime real estate markets in global cities lost their lustre? Are we at a peak and facing further price falls in some markets or are values at a high plateau whence they will stabilise or grow slowly for a while? In either case, are there alternatives which will outperform in coming years?

While a resumption of substantial prime real estate price rises in global cities cannot be ruled out (a continued flight of ultra wealth capital to these ‘safe haven’ assets could cause such an outcome), the probability of this happening is diminishing in the face of several factors.

First, many of the global ultra-wealthy are fully invested in these trophy assets; second, prime world city assets looked fully priced against historic levels; third, prime yields in many cities are at an all-time low in many places – and near the level of ‘risk-free’ government bonds.

Finally, there are potentially higher-yielding, lower-price purchases with higher potential capital growth upside to be made. These could be in other types of property, other locations and other cities.

Even if property is owner-occupied and not let, we consider that yields are a good indication of the underlying value of these assets. If they cannot be let to occupiers at an economic rent (one that yields a suitable premium over bonds), and there is no immediate prospect of significant rental growth, then it is more likely that capital values are being driven by speculative investors seeking uplift rather than occupiers seeking value. The use of speculative capital by purchasers tends to make markets more volatile so this puts those markets at greater risk of inflationary bubbles.

We see that where higher income returns are available in secondary markets that these non-core markets will become more heavily invested and may very well outperform prime markets as capital values respond accordingly and yields move in.

Second-tier city uplift

For those scanning global property markets for alternative asset classes, we have identified opportunities in second-tier cities and resort locations – for different reasons.

One argument for investment in second-tier cities is similar to that for secondary locations in first-tier cities, namely higher income returns. Adding to this lure is the prospect for some small cities to economically outperform as they rise in the global hierarchy, experience regeneration, reconstruction or renaissance.

We have noticed, for example, in other research projects that some small cities have performed particularly well in the creative and digital economies as they offer alternative living and working styles to this highly productive and newly wealthy sector.

FIGURE 13

Cross-sector comparisons: Gross yields as at December 2014

 
Figure 13

Source: Savills World Research, Eurostat

The rise of resorts

Leisure resorts and retreats, both as an investment class and as locations for residential investment, also look interesting. This is partly because post-2008 price corrections make some established resorts look cheap but also because there are new opportunities on the horizon.

There are two timescales of opportunity here. For established resorts with recovering prospects, there are buying opportunities now and in this publication we have covered some key examples, like the Algarve, Marbella, and Caribbean.

Longer term opportunities arise in Asia and other fast-developing areas, including South America. The growth of wealth in emerging economies, particularly Asia, and the ageing of these populations means that there are increasing numbers of people who will be experiencing leisure time, holidays and the prospect of a relatively prosperous retirement in the near future.

The leisure industry in Asia is nascent at present but its future can perhaps be glimpsed in experimental PRC projects like Hainan Island, the growing regional interest in Balinese and Phuket properties and the rising number of Asian skiers enjoying Japanese resorts like Niseko.

We anticipate that residential investment in the best of these emerging locations, as well as ones, not yet conceived, will show strong capital and income returns.

FIGURE 14

Ageing global population: growth of over 65s

 
Figure 14

Source: World Bank

 

 
Sanya, Hainan Province, China
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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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