High capital values no guarantee for high returns in world cities

London ranks as the fourth most expensive in mainstream rents, at an average of £350 per week, some £90 per week cheaper than San Francisco, according to Savills.

Hong Kong, alongside London, is known for having one of the world’s highest capital values, ranks 9^th in mainstream rents, at an average of £320 per week, though with the rental growth of 13.2 per cent last year, it could join the top five this year.

Paris continues to represent relative value on the world stage, with average rents a third cheaper than San Francisco. In the European context, it is 14 per cent cheaper than London and 12 per cent cheaper than Dublin.

Savills says high capital values do not guarantee high returns for world city investors

The top ten ranking by prime rental values looks very different. New York ranks most expensive, with an average of £2,300 per week, around five times the mainstream average, and almost £400 per week more expensive than the second place Tokyo. Like Tokyo, China does not feature on the mainstream list, but two cities—Beijing and Shenzhen—appear on the prime listing. Amsterdam also made the prime list, having seen prime rents rise by almost a fifth over the past year.

“San Francisco’s story is one of increasingly high demand from tech-savvy millennials who continue to flock to the city against a market that struggles for stock because rent controls act as a deterrent to new landlords. Ironically, the controls that are advantageous for existing tenants actually contribute to rising rents for new tenants,” Barnes added. “Our analysis tells us, perhaps counter-intuitively, that the cities that are most expensive to buy in are not necessarily the most expensive to rent in."

“In Hong Kong mainstream house prices are now around £1,070 per square foot, almost double the San Francisco average, but its mainstream rents are some 30 per cent cheaper,” he said.

The story in Dublin, New York, and Los Angeles is also one of strong demand from a growing population and limited supply. In Dublin, a buoyant domestic economy and constrained sales market during 2017 drove mainstream rents up by 5.7per cent, making this the fifth most expensive city for the average mainstream market household rent. At £340 per week, rents are now 40 per cent above their 2011 low and, perhaps surprisingly, on par with average rent in London.

“Investors and occupiers would do well to note the anomalies in the rental market,” continued Barnes.

Some cities are ‘investors’ markets’ seeing strong rental growth and high rents but relatively low capital values. Rental yields are high in these cities. Others provide low yields. This is good for tenants in cities such as Hong Kong, as they will likely pay less for rent than for a mortgage, but not so good for investors unless there is the prospect of capital growth.

Where yields are still relatively high, in Paris and Chicago for example, there is the prospect of further yield compression and consequent asset growth. Lower net yields in Sydney, Hong Kong, and London make capital growth less likely without rental growth.

Prime rents—a different order

New York tops the table for prime, or luxury, with rentals at £2,300 per week (over five times the mainstream rent). A raft of new supply in the prime segment has boosted the quality of prime rental markets in New York and so boosted rents overall, but concessions are increasingly offered to fill new buildings.

Tokyo, which does not appear at all in the top ten for mainstream rents, is the second most expensive global city for prime rents, at £1,940 per week. London and Hong Kong follow, at £1,700 and £1,690 per week, respectively, and are higher up the table for prime than mainstream. Savills expects Hong Kong to overtake London in 2018 as rents are rising there, but falling in London.

Amsterdam and Dubai also feature in the prime top ten, but not in the mainstream. This reflects demand for prestigious properties from global renters in these cities and the fact that a premium is being paid for relatively rare stock.

Amsterdam’s prime rents increased by 19.8 per cent in 2017, putting it fifth at £1,370 per week. A major and growing hub for the European headquarters of multi-national companies, rents have been driven up by relocating expats coupled with a shortage of stock.

Two Chinese cities feature in the top ten, Beijing and Shenzhen, with prime rents of £1,200 and £1,020 per week, respectively. They also attract global premium tenants (particularly as overseas residents are unable to buy) and prime stock remains relatively rare enough to command a premium.

Dubbed China’s Silicon Valley, Shenzhen’s population has risen from 300,000 in 1980 to 12 million today. Expats together with a rising number of wealthy domestic tenants have been fuelling prime rental demand.