The weakening global economic outlook will make 2012 a challenging year. Oxford Economics forecast global GDP growth to slow to 2.5% in 2012, down from 2.8% in 2011, led by slowed growth in eurozone economies and emerging markets.

Action is already being taken. Shanghai has responded with a drive to sustain domestic economic growth and employment levels. Conscious of the contribution the housing market makes to GDP, cooling policies are expected to be loosened in the second half of 2012.

Mumbai, having seen price increases of 154% over the last 6 years, looks to be on the brink of correction. 2012 may mark the tipping point, with falls of between 10-15% anticipated.

This trend may be echoed in other cities that previously experienced strong price growth. Additional buyers’ stamp duty coupled with a cooling economy may see prices in Singapore fall between 5% and 10% in the next six months.

For others, 2012 will offer more of the same. While Japan’s ageing, and shrinking, population is well documented, Tokyo’s is increasing, a trend accelerated by last year’s earthquake. Accelerated rural to urban migration may buoy demand for residential property and help to sustain current prices.

‘Old world’ cities, particularly those longest established as safe deposits of wealth (namely London, Paris and New York), may sustain pricing over the coming year. In London, we believe the influx of global wealth in uncertain times still has some time to run, and may see a further boost from the international attention that London will receive in the run up to the Olympics. For these cities, 2012 will be tough, but strong global city fundamentals will shelter them from the worst of weakening domestic conditions.

Future city drivers

Companies operating in a global environment will be highly responsive to changing economic conditions. Employees will be relocated and new business centres set up where product demand and production efficiencies dictate. In the information age, when human talent is a key asset, the living conditions and quality of life available in world city locations is increasingly a key consideration in these decisions. The quality and cost of housing is becoming a business driver.

Different cities will constantly come to the top of the league table and then wane. Established global cities are difficult to dislodge but we expect new ones to join our top 10 in future. Most, if not all, of these newcomers will arise out of emerging economies rather than developed nations as human capital develops in the premier cities.

The importance of income

After a period of 120% capital growth since 2005, it is hardly surprising that some ‘new world’ cities look very fully valued. Yields are low in ‘new world’ cities, despite having moved out in the last six months of 2011 due to low/falling capital values and more rapidly rising rents.

The cities of Hong Kong, Mumbai and Shanghai are particularly low-yielding in relation to other World Class cities so may be expected to show more volatile price movements as a result. Demand for property may be expected to wane further in some of these cities if the prospects for future capital growth are seen to be diminishing – there is simply insufficient income from residential property to keep investors interested.

In these circumstances, the fundamental value of rental income puts a floor under price falls. In a world where global capital is increasingly seeking solid and reliable income streams, we think that these rental income returns will increasingly start to determine capital values rather than be a reflection of them.

Global Capital

Residential property markets in world cities are continuing to perform in a league of their own, often divorced from the national economies in which they operate. The performance, particularly of high-end property, in these World Class cities gives an important insight into the movements of international capital across the globe. This capital is of increasing importance to the property world. It impacts directly on sales rate, location and property type of new developments in all the world cities.

Equity receipts from international buyers are increasingly important to debt-starved developers across the globe, but particularly in the west. Truly World Class cities need a supply of residential stock that is a global commodity rather than a local product and which caters to residents who are ready, willing and able to choose a home, or homes, anywhere on the globe.

Taken from
Insights: World Cities Review Spring 2012