Local factors make – and break – world city markets
10 September 2012
This year the residential markets of the world’s leading cities have become more localised. The strongest price growth has been seen in those world cities that were buoyed by domestic demand, while international investor cash has retreated to a few core markets with established, long-term investment credentials, says international real estate advisor, Savills.
The firm’s Autumn World Cities Review, published today, reveals that the top performing markets are fuelled by domestic wealth generation. Hong Kong topped the list with half year price growth of 7.4%, followed by Moscow and Sydney, which recorded 5.5% and 3.7% respectively, all well ahead of the index average of just 1.2%. This confirms Hong Kong’s position as the world’s most expensive city, with values now 82% ahead of second most expensive London and five times those of Mumbai.
‘Old world’ markets of London and New York continued to attract international equity seeking long term stability and growth, with values rising 2.8% and 1.1% respectively. The biggest fallers were Paris (-3.4%), Shanghai (-2.6%) and Mumbai (-1.7%), which suffered as investor sentiment wavered.
Hong Kong has been the real winner so far this year. Mainstream market recovery, supported by domestic buyers and a loosening of mortgage availability, helped to boost values to another all time high in June. Although it seems that the price falls of late 2011 were a temporary blip, this is a volatile market that could turn negative again.
At the other end of the scale, Paris is the biggest loser of 2012 and faces a period of uncertainty. The eurozone crisis continues to discourage investment in euro-denominated assets, and the market has been dealt a double blow by President Hollande’s proposed increases to taxes on high end property and investor gains. Further price falls now seem unavoidable in the French capital, and London is the potential beneficiary as international money seeks an alternative haven within the geography of Europe, but outside the eurozone.
London remains the second most expensive world-class market, but uncertainty regarding the impact of new stamp duty rules, announced in the March budget, has already slowed activity and price growth at the top of the market. A period of flat prices now seems likely, though market fundamentals (high occupier demand and limited supply) favour growth longer term.
Cities set for growth
The outlook for many of the ‘new world’ cities in the Savills index (e.g. Shanghai, Mumbai, Moscow) depends on their ability to continue to generate wealth, and for that wealth to be invested in real estate. Singapore’s strong domestic market suggests the potential for further growth, while Hong Kong continues to ‘defy gravity’ thanks to its proximity to its mainland ‘domestic’ market.
“Emerging markets, and Chinese buyers in particular, still have the potential to move other world city markets,” says Yolande Barnes, director of Savills Global Research. “Last year we said that the unleashing of high net worth Chinese investor monies could boost London’s prime markets by 15% and the same must be true of other top cities, but this will require the relaxation of currency export controls and overseas ownership restrictions.
“By contrast, China’s lead world city, Shanghai, will need to see its market adjust to a more sustainable domestic consumption model in the future before significant price growth can resume.
“We identified New York as a buy opportunity in 2011, because it looked good value and offered ‘old world’ stability. Recent steady price growth, low mortgage rates, a shortage of supply in the upper tiers of the market, and solid and growing overseas demand, suggest that it is now be poised for a strong recovery.
“What is clear is that - whether boosted by international or domestic wealth-generation- the select band of cities that are measured in our index have increasingly more in common with each other than with their own domestic markets or economies.”
NOTES ON THE INDEX:
The Savills World Cities Index differs from other international real estate indices in that it measures not just the prime markets of each city, but takes account of the mainstream by measuring a basket of properties – dubbed the ‘Savills Executive Unit’ or SEU – to give the truest possible indication of all market price movements on a like-for like basis. Importantly, it has been designed to allow international audiences to compare the cost of accommodating a core business team in each city, a vital consideration for any business with international operations or aspirations.
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