Research article

Commercial and Residential trends

From the rise of digital to the huge value reductions in Moscow, we examine the latest real estate trends.



The key trend this year is the continued rise of the tech industry in almost all of our world cities. The telecommunications, media and technology sector is so important to eight of our 12 cities that we have included them in our special Tech Cities research programme for 2015.

The disruption of conventional city economies by the digital economy is showing up in the changing geography of cities. The traditional financial and legal districts are no longer those experiencing the highest leasing activity, nor even the highest growth in rental levels.

Even those not featured in Tech Cities are seeing strong influence from digital technology occupiers, with the world city status of places like Paris and Chicago helping to attract the human talent so vital to their industry. As a result, demand for ‘creative space’ is rising and office rents are outstripping those for financial space in all our world cities, except Moscow.


The American cities featured in this issue are experiencing high demand resulting from economic growth, but are singularly diverse in what they are offering occupiers. New York and San Francisco are fast-growing talent magnets and the most expensive American cities for occupiers, while Chicago continues to supply corporate headquarters for big hitters – even if they are digital companies.

Meanwhile, Miami has attracted the ‘eds and meds’: the research institutes and those at the forefront of medical and life sciences. It also draws in real estate investment from Latin America.

Los Angeles seems to be offering something else again: cheaper space for backroom and corporate America in an extensive and high-supply city. Whatever the story, office rental growth in 2014 was strong across all the major American cities featured here and, with continued GDP and jobs growth, is likely to continue (see fig. 6).


Figure 6


Recent research by Savills, in conjunction with Deakin University of Australia, has taken a close look at how real income returns to grade A office investors differ from quoted market yields in cities around the world. It found that a combination of investor costs and tenant incentives, like rent-free periods or rebates, reduce investment yields – sometimes very considerably.

What at first glance appears to be a diverse range of income returns from world cities turns out, in reality, to be a much closer range of yields. The average world city ‘effective yield’ is 4.2%, ranging from 6% in Chicago to 2.9% in Hong Kong. What is interesting is that the range around the average between cities is smaller for these ‘true yields’ than the more misleading quoted market yields (which range from 3.1% to 12.5%).

It would appear that global investors do value the ‘in the pocket’ returns from institutional investment grade office buildings across the foremost world cities in much the same way. Prime grade A offices in New York, LA, London, Tokyo and Paris are all being bought off effective yields of around 3.5%; Sydney, Shanghai and Singapore, off 4.5%.

Fig. 7 shows how our 12 world cities fare in this measurement. It shows how an average reduction of 1.7 percentage points is experienced by grade A office investors when they receive actual rental income net of costs rather than headline rent.


Figure 7

Chicago has the most reduced net effective yields – 6.5 percentage points below the quoted market yields. Hong Kong, Tokyo and London (West End) see the smallest reductions from market to net effective yield at 0.3 percentage points.

So, while yield compression does seem to have occurred in most world cities, its extent and impact does not differ as much as headline market yields might suggest. Investors looking for ‘in pocket’ income returns would do well to look at net effective yields, particularly in the US where high gross market yields could be misleading.



The capital value of residential properties occupied by the SEU across all 12 world cities (including US cities) fell by 1.1% in the second half of 2014 – the first overall fall since 2008 (see fig. 8).


Figure 8

This was almost entirely due to huge value reductions in Moscow, which totalled 33% in just six months in US dollar terms and pushed the all-city average down.

Small falls were also seen in Paris and Singapore in all sectors, and London’s prime sector. Meanwhile, the US cities in the group were growing by an average of 3.1% across the board, with San Francisco the star performer, showing 7.1% in the six months to December 2014.

The value of all residential property occupied by the SEU now totals 31% more than it did in December 2008. Recovery occurred later in the US cities, totalling 21%, which suggests that it may have further to run.


Further evidence that US capital values have some headroom is that, while capital values were falling, rents have been rising (see fig. 9). The SEU average rent for the US cities is up 42.6% since 2008, compared to a 19.2% rise in our 12 cities overall.


Figure 9

The all-cities rental index is distorted in the short term by huge rent falls in Moscow, totalling over 50% in mainstream markets and leaving them 42% below their 2008 levels. With rent reductions greater than capital value falls, we expect yields to move out further.

Residential yields across the rest of our cities are stable and rental growth is broadly steady. Only Singapore has experienced small rental falls across the board and Hong Kong in the prime markets. Meanwhile, Paris and Shanghai rental growth levels are low. The weaker fundamentals of occupier demand in these cities make them look vulnerable to near-term small capital value falls.


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