Research article

Yielding to change

Vibrant city experiences and employment relocations are helping to drive prime residential rental markets.

Rental markets are driven by occupier rather than investor demand and have had a far less turbulent time than the sales markets over recent years. The Savills World City Rental Index has appreciated by 55.5% since 2005, less than half the growth seen in our Residential Capital Value Index over the same period, which is up by 121.8% (click on fig. 10 to enlarge). Sustained levels of capital value growth over and above rental growth have reduced yields, from a global average of 5.3% in 2007 to 4.4% at H1 2014.

Figure 10

Income-seeking investors are now targeting their activity in select markets. New York has already enjoyed increased demand for investable stock, although entry points are limited (given the dominance of cooperatives in this market). Yields in Paris are rising and canny foreign investors are taking advantage of a weak domestic market to snap up suitable properties.

In London, yields are reducing as capital values outpace rents. However, higher-yielding outer London and secondary locations are growing in attractiveness due to huge occupier rental demand for this kind of stock.

Sub-3% yields in Hong Kong and Singapore failed to deter investors who chased capital value growth that, until recent years, had been spectacular (click on fig. 11 to enlarge). With cooling measures now in full force, these days are over and we anticipate a modest upward movement in yields in coming years as occupier and investor demand re-aligns.

Figure 11

Corporate demand

Some rental demand results from corporate relocation, which can be a key driver of the prime rental markets of the world’s top-tier cities. In the prime London residential market, for example, nearly half of all tenants rent due to employment relocation. The corporate market is also important to cities such as Hong Kong and Singapore, which have large financial services sectors and attract a significant number of workers and residents from overseas. In Mumbai, where foreigners are not allowed to purchase residential property, the rental market is the only option for, and closely linked to the success of, international corporations in that city.

Traditionally, the corporate relocation market has been fuelled by the financial and insurance services sector. In 2007, for example, 50% of tenants in London worked in this sector. But sector downsizing in the wake of the global financial crisis, coupled with reduced relocations budgets, has seen these occupiers fall to just 39% of the market. The same is true of Hong Kong, which has seen the rapid consolidation of international banks dampening demand for prime rental property. The result is falling prime rents, which are forecast to drop by 15% by the end of the year.

In the place of finance sector workers are tenants employed in the information, technology, telecommunications, media and advertising sectors. In London, the same trend is evident in the growth of the tech industry around Silicon Roundabout and the recent regeneration of King’s Cross (which has attracted Google as a major tenant). The same is true of New York, where there has been vibrant tech industry growth in and around the Flatiron District, SoHo, Tribeca and Dumbo.

This has fuelled both office and residential rents in these areas (Tribeca is now more pricey than Manhattan’s upper east and west sides). For tenants in these creative industries, the live/work balance is often blurred. As a result, the whole city experience has become a major driver of the success of these tech and creative hubs. The continued attractiveness, vibrancy and lure of the urban environment, as well as the availability of cheap workspace, will remain critical to the continued success of these locations.


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