Frothy or flat?

We examine the cost of real estate in key cities across the globe.

 

18 September 2013, Words by Yolande Barnes

 

Our latest World Cities Review focuses on the shifting balance of the global property market. Download here.

Is quantitative easing creating asset price bubbles? Some economic soothsayers seem to think so. Cheap credit has pushed up prices in global commodity markets, the gold market and worldwide stock markets. But has QE affected international property? Are we also facing a global real estate bubble?

The 2008 debt crises heralded an era of all-time low interest rates for many North Atlantic countries. Others such as China, Japan and Singapore, have seen low rates for savers for some time.

It is little surprise then that residential property investments which yield gross income returns in excess of 5% (with expectations of longer-term rental and/or capital growth) have become an increasingly interesting proposition – not only to individual buy-to-let investors but also to funds and institutions seeking inflation-related income.

People have especially sought income-producing assets in countries where there has been little alternative choice. Real estate inflation is exacerbated by a lack of investment alternatives.

In this issue, we look not only at the cost of real estate to global corporations, but have also analysed the extent to which residential capital values have been inflated by investor demand over and above the fundamentals of occupier demand. We do this by analysing bond-adjusted residential yields in each of our world cities. In some places, income returns for real estate are substantially above those available from gilts and so those cities look fairly valued. But in others, rents have not kept pace with capital values and the returns available on 10-year government bonds are higher, so these cities look potentially overvalued.

Low yields do not necessarily presage a universal property price crash, but it does seem likely that rents will have to move upward or capital values fall in some cities before significant capital growth can be resumed. Rising rents are most likely in cities where economic growth, inward migration, and hence real estate demand, is increasing against inadequate supply.

The same global forces are impinging on each of our world cities but are coupled with very different local supply and demand conditions. We expect a range of investor experiences in future. Some cities display distinctly frothy traits while others still yield well in relation to local bond benchmarks. Our index of world city values is likely to show considerable variation for some time to come.

 
 

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Key Contacts

Yolande Barnes

Yolande Barnes

Director
World Research

Savills Margaret Street

+44 (0) 20 7409 8899

 

Paul Tostevin

Paul Tostevin

Associate Director
World Research

Savills Margaret Street

+44 (0) 20 7016 3883