As global capital value growth slowed last year, rental growth in several world cities began to catch up, which has pushed up yields.

Global rental values grew by 4.1% between June 2011 and June 2012, compared to 2.1% in global capital values. This suggests that, as investor and owner appetite eases, these world-class cities are continuing to attract people to live and work. If these people don’t buy, they rent.

Yields in New York are the highest of our world cities, grossing 6.9% in June 2012. New York is a rental city, with solid demand across a wide tenant base, including strong corporate demand.

As a result of tight mortgage lending requirements in the US, more people than ever have turned to rent, pushing up rental values. Rents for the SEU increased by 1.8% in H1 2012. This was a slowing of growth over the previous half year, when rents grew by 6.2%. It reflects some renewed activity in the mainstream sales markets and a general strain on affordability in the rental market.

New York’s experience illustrates the permanent tension between rents and capital values. There comes a point when yield size is a compelling buy signal, both for investors and current renters. Equally, there is a point when capital values cannot outpace underlying rental demand for ever and rents eventually catch up as incomers flood into high-demand world cities.

In Mumbai and Shanghai, the rental market outperformed the sales market in H1 2012, recording growth of 5% and 1.9% respectively.
It is no coincidence that these two cities have seen the highest capital growth of any of our world cities since 2005 (150% and 137% respectively), and have among the lowest yields.

With capital value price falls in both cities in the first half of 2012, landlords are taking the opportunity to push up rents and investors are looking to income returns as a rationale for action, given that the prospects of capital growth are reduced in the short to medium-term.

Despite rising rents across our class of world cities as a whole, some cities did experience rental value falls in H1 2012. Singapore saw modest falls of -1% over the period, suffering from reduced expatriate housing budgets as key financial and business service firms cut staff and scaled back. Nonetheless, yields are robust and the city’s long-term demand fundamentals remain strong, even if rents do fall by -5% as anticipated by year end.

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Taken from
Insights: World Cities Review Autumn 2012