Rental growth is a good indicator of the underlying demand for homes. The interaction of demand and supply is readily apparent in rental growth without the “noise” created by purchasers with motives other than occupation.

Overall, demand for accommodation in all our world cities is healthy. The rents paid by the seven households in our Savills Executive Unit (SEU) rose by 5.1% on average across all cities. However, there was large variation around this average.

The biggest growth was in Mumbai where the opening of new transport links has changed the nature of a whole sector of the city, north at Andheri. The new metro link will increase connectivity and decrease travel times to the centre – from two hours to 20 minutes – raising real estate prices in that area significantly. The “priming” of the neighbourhood has already led to a rise in rental values of up to 50% in 2012 alone for certain types of property and is expected to increase further. This illustrates the dynamic and evolving nature of many global cities and the dramatic impact that significant infrastructure improvements can have, especially in emerging economies.

Investors looking for significant value uplift will try to anticipate such changes in any of our world cities and speculate on their impact. Indeed, it would seem that infrastructure improvements in Mumbai had already been priced into capital values – tenants respond much later than investors.

For those looking for solid returns and rental growth, our world cities have performed well, especially in the mainstream markets that serve the administrative staff of our executive unit. Any more recent, weaker rental growth seems to have been concentrated in the prime sectors of the cities, where the CEO and directors are more likely to live. In Hong Kong, for example, the mainstream market grew strongly in 2012 while prime rental markets fell. 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.

Prospects for rental growth are strong where the outlook for economic growth is positive, as this naturally leads to people seeking employment and accommodation in the city in question.

Growth prospects are also further strengthened where there is a limited supply of new or available housing. Rental growth in “old world” cities is more likely to be driven by such a lack of supply. 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.

Taken from
Insights: World Cities Review Spring 2013

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