Research article

Rental Growth Rates Then And Now

Sharp contrasts in rental rates highlight the changing nature of the world’s leading cities


Market rents represent available supply, occupier demand and affordability, unclouded by speculative or investment activity. Our analysis of occupier costs, including rents for both residential and office space, are of direct importance to occupants and would-be occupants, as they influence where and how people will end up living and working in a city – but they should also be the touchstone for any longer term investor.

Rental levels reflect the number of people seeking space, either for living or working in a city, and their ability to generate cash for rental payment. This operates against the supply of the right work/living space that people want.

Average rental growth across our world cities in 2015 (see fig.1) was 2% for office space and 1% for residential – these averages covered a range of different experiences. Residential rents in San Francisco grew by 14%, but they fell by 18% in Moscow. Sydney topped the office rent growth table at 11%, while Dubai’s office rents fell by 16%. Not only do different supply conditions pervade in different cities, demand patterns have also changed significantly.

Figure 1

FIGURE 1Annual rental growth in 2015

Local currency terms

Source: Savills World Research

In the years immediately after 2008, emerging economies were strong. Consequently, demand for workspace was also strong in our ‘new world’ cities of Shanghai, Singapore, Hong Kong, Mumbai and Moscow. Rental growth during this period varied according to supply conditions but rents have remained significantly higher in some of these cities. Office rents in Hong Kong and residential rents in Mumbai, for example, are still 37% higher than they were in 2008.

However, fortunes have reversed and the new world cities have seen some of the most volatile markets (see fig.2). Office rents in Mumbai are down 32% on 2008 levels, despite robust growth last year, while residential rents in Moscow stand at just over half their previous seven-year level, having fallen 53% since 2008.

The big growth story of the past seven years has been the ‘upstart cities’ of San Francisco, Berlin (pictured) and Dublin, which saw rental growth in the last year averaging 6% for workspace and 8% for homes. San Francisco’s residential rents grew 14% in 2015 alone, reflecting strong demand from a growing population and a booming creative-digital economy. The city’s residential rents are now 72% higher than they were in 2008, while Berlin’s are 58% higher for new lettings to our sample group. Office rents are now 30% and 28% higher in the two cities, respectively.

Figure 2

FIGURE 2Ten-year residential capital value growth

Local currency terms

Source: Savills World Research


Future rents in all our world cities will be determined by the economic success of those cities and their ability to continue scoring high on various performance measures. Maintaining their ranking will indicate that they are likely to continue attracting global tenants. Those cities with high ratings for economic potential will likely see the highest rental growth in the future. Twelve of our world cities are in the AT Kearney top 25 global cities for economic potential, so they would appear to be the ones to watch (see fig.3).

Figure 3

FIGURE 3AT Kearney ranking for global city ‘future potential’

Source: AT Kearney

While there has been a significant change in the rates at which income streams are capitalised by investors over the past seven years, it is the actual rents received from occupiers that will ultimately determine the long-term success or failure of real estate investments, as even capital value appreciation will be determined by value assumptions made on rents – even if credit and capital availability change. Investment performance is underscored by rental levels and growth, and this is particularly critical at a time when worldwide cap rates are very low and there is fierce competition between a wide range of investors searching for income-producing real estate assets.

The chart below (fig 4) shows the price that investors have to pay for buildings (given current cap rates) and the rental levels they will achieve per occupant. This analysis illustrates how different city markets fall into four quadrants.

Figure 4

FIGURE 4SEU combined (office and residential)

Source: Savills World Research

The upper left quadrant is where capital values are high in relation to rents and there will either be most pressure to achieve higher occupancy rates and/or where yield compression may have reached its limits. The lower right hand quadrant is where rents are high in relation to capital values so there may be scope for further yield compression if rents are not falling.

The lower left quadrant illustrates cities with relatively low rents and capital values, with the best-value cities falling below the trend line. The upper right quadrant illustrates where both capital values and rents are high; our most mature and developed global markets sit here.

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