As global wealth has been pouring into real assets, including world real estate, since 2008, so the motives for real estate acquisition have shifted. While investors used to be primarily seeking safe haven assets in which to store wealth, we now detect an increasing interest by global investors in income-producing assets.

This shift means that the fundamentals of rental growth and yield are becoming more important to buyers whose search is moving “down-market”, away from prime and trophy properties to mainstream markets, from commercial to residential and away from the city core to fringe.

In demand

While rental demand and growth show that the fundamentals of demand and supply are reasonably strong in most of the cities studied, there are considerable variations in yields. These disparities arise due to the quirks and differences between capital value and rental markets, as well as investor sentiment. Understanding these anomalies will assist buyers who are looking to make different types of investment play.

Variations in yield tend to occur because of differences between owner and tenant behaviour. Owner-occupiers tend to value different property features to those considered desirable by tenants and, at the same time, investors are more active in some markets than others. There are also ways in which investors favour some markets over others. For example, foreign investors are focusing on prime rather than mainstream London, and Singapore over Shanghai.

Variable yields

Across all our world cities, yields are more variable now than they were seven years ago. Back in 2005, most cities, in the “old world” and “new world”, were showing an annual gross rental return of around 5.5%. There is now a huge range of returns, from 2.4% to 6.4%.

Yields have moved dramatically in many “new world” cities because rental growth has not kept pace with very high levels of capital growth, caused by the weight of money bearing down on Chinese and Indian markets in particular.

Higher income

While falling interest rates in the East and West have caused some yield contraction in the “old world”, this has not been nearly so dramatic. The higher income returns available can be seen as compensating for the much lower rates of “old world” capital growth. In North American cities, where the prospects for capital growth may be seen as increasing, the combination of these yields, ongoing rental growth and low capital values are considered by many overseas investors to be a strong buy signal.

Any investors nervously regarding future capital growth in Asian markets may start to view low yields as a sell or hold signal, at least until – or unless – rental values start closing the gap.

Taken from
Insights: World Cities Review Spring 2013

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