Striking a balance

How does occupier demand underline investment quality? We compare residential and office rental growth.

18 September 2013, Words by Paul Tostevin


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While capital values fluctuate according to investor demand and sentiment in the investing environment, real estate rental values more accurately reflect the fundamentals of occupier demand in a city.

It is notable that rents for both commercial and residential property have been growing at a more modest rate across most world cities than have capital values.

The chart below shows how residential property has become a desirable global asset since markets began to recover in 2009. Overall, the occupier market for residential has significantly outperformed that for offices globally. World prime and mainstream residential rents grew by 11% and 15% respectively from December 2008 to June 2013, but prime and secondary office rents are still below their December 2008 values by 12% and 2% respectively.

A mixed picture

Worldwide, prime office rental growth across the board appears to be levelling off. This has been led by more pronounced falls in rents in some ‘new world’ cities and steady growth in the ‘old world’ cities. ‘Old world’ prime office rents have been picking up since late 2009, and are now 3% above their December 2008 values.

By contrast, ‘new world’ prime offices, having seen some recovery between 2009 and 2011, have since wobbled downwards and now stand 25% below their December 2008 levels. This would seem to justify the search for ‘old world’, ‘safe haven’ real estate assets by global investors. Meanwhile it raises questions over the fundamentals of demand and supply in many ‘new world’ locations, notably Singapore, Mumbai and Moscow – especially in the prime sector where it would seem grade-A offices may have been particularly overpriced prior to 2008.

When it comes to secondary offices, the ‘new world’ and the ‘old world’ have performed in a very similar way. Having fallen 17% between 2008-2009, ‘new world’ secondary office rents are now levelling off at their former December 2008 values.

Investment appeal

The fundamentals of mainstream residential across all the cities seem to have been substantially stronger than those for even secondary office. It is interesting to note that globally, all residential rents have significantly outperformed office rents, making this sector look a highly viable investment asset class. In contrast to prime office rents, the ‘new world’ has outperformed the ‘old world’ in mainstream residential rents. Here ‘new world’ mainstream residential rents have grown by 20% and ‘old world’ mainstream rents by 9% since December 2008.

This pattern also applies to prime residential rents, which at a global level have grown slightly less than mainstream residential rents but are still slightly higher in the ‘new world’ economies compared to the ‘old world’, at 14% and 8% above December 2008 values respectively.

The global market

As always, the global averages hide big disparities in rental performance. Some cities stand out as having weak office demand coupled with oversupply of stock. These cities are overwhelmingly concentrated in the ‘new world’ but notably offset by the odd exception like Hong Kong secondary offices, for example, where demand has been very strong and supply limited. Indeed, at 30% above December 2008 values this secondary market has outperformed prime.

When it comes to housing, the consistent growth in all cities (except Tokyo) of mainstream residential rents illustrates how growing populations and limited space are the driving fundamentals of many world cities. Notable residential mainstream rental growth has been seen in Hong Kong (45%), Sydney (32%), Mumbai and Shanghai (27% and 25%) since 2008.

Prime residential rents, on the other hand, are behaving quite differently to their mainstream counterparts. The withdrawal or reduction of rental allowances paid to high-level employees of international corporations across the globe have suppressed rental growth in this sector. In Tokyo, Moscow and Hong Kong, prime residential rents remain lower than they were in December 2008. A notable exception to this is Mumbai, which stands 52% higher than December 2008 (but where rents have fallen slightly in the past six months).

New York also stands out as having seen high prime residential rental growth since 2008 (31%), supported by very limited supply in Manhattan following cessation of development activity over the past five years, coupled with strengthening demand. This further supports our assertion that the Big Apple is a compelling investment case.


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Key Contacts

Yolande Barnes

Yolande Barnes

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