April 8, CHINA: Savills recently launched the fifth edition of the World Cities Review. In this edition we revisit our class of 10 global cities in the light of increasingly challenging economic conditions. These 10 global cities include five from the “old world”, namely London, New York, Paris, Sydney and Tokyo, and five from the ‘new world”, namely Hong Kong, Moscow, Singapore, Shanghai and Mumbai.
April 8, CHINA: Savills recently launched the fifth edition of the World Cities Review. In this edition we revisit our class of 10 global cities in the light of increasingly challenging economic conditions. These 10 global cities include five from the “old world”, namely London, New York, Paris, Sydney and Tokyo, and five from the ‘new world”, namely Hong Kong, Moscow, Singapore, Shanghai and Mumbai.
Overview
New geographies of wealth creation have caused a worldwide change in demand for real estate. New nationalities are now seeking to buy in Asian cities, as well as the “old world”, meaning the last five years have seen a significant shift in real estate markets. It is possible that 2013 may be another turning point. Many of the super-wealthy have nearly fully invested in the key cities, meaning that activity could abate in some quarters and shift to new locations. We have detected a stabilisation in many of the world city markets, sometimes assisted by deliberate cooling policies. There has also been a shift in Asia Pacific buyer interest toward the USA, for example, which currently looks good value. New investment may be less dominated by China, India and Singapore, as emerging nations such as Malaysia, Indonesia and the Philippines play an increasing role.
Mr. Albert Lau, Head & Managing Director of Savills China said: “As the world financial centre, Shanghai real estate market developed rapidly. At present, the economic environment in China is stable, and real estate market is still growing. The government policy will make this market become more healthy and mature. In 2012, Shanghai will be boosted by renewed wealth creation.”
Counting the costs - The true costs of global commercial and residential real estate are an in creasing consideration for many industries
Real estate is just one of the many costs associated with setting up, expanding or relocating global businesses. As usual, Hong Kong ranks number one in total annual real estate costs, roughly three times the cost of locating in Mumbai or Shanghai. The big surprise is the position of New York as the third most expensive city by this measure. While headline residential capital values look cheap by international standards, rents have grown fast and the taxes and other costs associated with occupancy are high. The total costs measure reveals that most of the “new world” is relatively cheap, with Sydney standing out as a particularly good value “old world” city, well-placed to attract expanding companies in the Pacific region. Overall, the growth in total costs since 2008 has been variable. Premises for creative businesses in Mumbai and New York are over 20% more expensive now, having grown from lower bases on the back of strong economies, while Singapore and Tokyo are up to 20% cheaper.
There can be significant differences between the headline rent on commercial premises and the total costs that tenants end up paying. In New York, for example, although the basic rent for an executive unit operating in a creative industry is the fifth most expensive in the world, on a £ per sq ft basis, this rises to the second when whole space and associated costs like local taxes, letting costs and service charges are considered. These extra costs add 53% to the headline rent. London is another city where headline rents per sq ft are very high. These conspire to make London’s whole space costs the second most expensive of the 10 cities for a small financial company, such as a hedge fund, locating in the most prime district of Mayfair, but it is a the cheapest cities for a small creative company start-up. Paris, on the other hand, looks very cheap for the financial unit, ranking third cheapest of the 10. As seems to be usual now in all our global real estate rankings, Hong Kong ranks as the number one most expensive city for both types of company, by a big margin, for a whole office (as opposed to per sq ft). Hong Kong’s offices are particularly expensive for small companies in the prestigious central financial district and total costs here are two and a half times the average for the other 10 cities – and nearly twice that of its nearest rivals. Of the 10 global cities, Sydney, Shanghai and Mumbai have the lowest associated real estate costs, while London, New York, Moscow and Singapore have the highest.
Strong prospects - Healthy demand in all our world cities equates to solid rental returns
Rental growth is a good indicator of the underlying demand for homes. Overall, demand for accommodation in all our world cities is healthy. The biggest growth was in Mumbai. Generally, the top end properties of Hong Kong, Paris, Singapore and Tokyo have been weak, perhaps reflecting falls in the relative level of corporate activity in these cities. Meanwhile, those “new world” cities with the space and infrastructure to expand, like Shanghai, will see weaker growth than those that are more land-constrained, such as Mumbai and Singapore.
Paying dividends - Global Property investors are turning their attention to income-generating residential assets
Across all our world cities, yields are more variable now than they were seven years ago. Back in 2005, most cities, in the “old world” and “new world”, were showing an annual gross rental return of around 5.5%. There is now a huge range of returns, from 2.4% to 6.4%. yields have moved dramatically in many “new world” cities because rental growth has not kept pace with very high levels of capital growth, caused by the weight of money bearing down on Chinese and Indian markets in particular.
Rich pickings - The value of ultra-prime homes in key areas has doubled thanks to billionaire buyers
The cities in newly emerged economies have significantly outperformed those in the “old world” economies of the US, Japan, Australia and Europe. Only London’s ultra-prime market stands out among the “old world” cities as having shown significant growth since 2005, totalling 107%. New York’s billionaire real estate stands only 47% higher and Tokyo ultra-prime residential is only 8% more expensive (in local currency) than it was in 2005. Rising commodity prices and the creation of new, ultra-rich classes in China and Asia have precipitated the highest growth in ultra-prime real estate values. Singapore and Mumbai stand out as having seen the highest growth in ultra-prime values since 2005 (at 232% and 176% respectively). Both grew from relatively low base values. Te highest overall values are seen in Hong Kong. Te record deal there was £8,200 (US$13,100) per square foot for a house in Deep Water Bay Road in 2011. 2012 saw significant curbs imposed on billionaire buyers in some cities. This has resulted in slowdowns rather than falls in most of them. Singapore’s ultra-prime growth slowed to about 5% in the year, while Hong Kong’s stalled and London’s also slowed significantly, both in the second half of 2012. Moscow prices slowed alongside commodity prices, which are closely linked to the value of Russian ultra-wealthy individuals. In France threatened tax measures seemed directly to have curbed activity. Our ultra-prime index in Paris is down, nearly -8% on the year, while billionaire Riviera properties ended down -10%. Overall, the ultra-prime billionaire markets are stable. Real estate, especially in “old world” countries, is seen as a safe store of wealth. Te US, in particular, looks ripe for growth.