The residential sectors of our 12 global cities are shaped by a variety of factors. The value of mainstream residential real estate is more likely to be determined by the domestic economy, while prime property is more aligned to international forces.

International businesses operating in world cities compete for a global pool of talent. For those looking to hold on to the best staff over the long term, the costs associated with purchasing or renting residential accommodation become highly relevant – as does the quality of life available in a city.

Often a city will be as much an attractor of human capital as the company itself.

The number, choice and characteristics of residential neighbourhoods, accessibility to work, and the cost and affordability of accommodation will all play a part in an organisation’s ability to attract staff. The price of residential accommodation will also help to determine the size of salaries and allowances needed to retain that talent.

The first chart on the opposite page shows the average values for the homes occupied by different household members of the SEU on a square foot basis (click on fig. 8 to enlarge). The homes of the CEO and directors are considered ‘Prime’, while those of the administrative, ‘Mainstream’.

Our analysis highlights the difference between Hong Kong and ‘the rest’. Prime prices in Hong Kong, at just over $4,000psft, are four times those of Dubai and more than twice those of Singapore. Space, particularly prime space, is at such a premium in this high-rise city that units are particularly small and expensive. The pressure of Chinese money on the market has pushed prices to high levels in recent years – particularly in the prime markets. Although cooling measures have slowed the top end of the market recently, Hong Kong still hosts the world’s most expensive residential real estate.

Prime market entry level

While Hong Kong tops the ranking for mainstream values at $1,300psft, the gap between it and other cities in this sector is less marked, with London ($1,100psft) and New York ($1,000psft) not far behind.

It is notable that in most cities there is an entry level for prime markets at or around US$1,000. Prime values rarely fall below this in developed economies. It is as if the international market and elite workforce in world cities set their own international standards. This means that domestic markets can vary from prime markets to widely differing extents.

In New York, for example, the mainstream markets are little different to prime, on the other hand mainstream values in Shanghai are relatively low by global city standards ($400psft) but prime property values are on a par with Tokyo and New York ($1,500psft).

This means that different types of employers will find residential prices less critical than others when choosing cities in which to locate. Those employing or seeking to attract elite employees may find some cities little different compared to others, while those employing more administrative staff will find residential costs more critical.

Rio de Janeiro offers the cheapest accommodation on a price per square foot basis in both the prime ($700psft) and mainstream (less than $100psft) sectors. Properties in Rio – along with other cheaper cities – tend to be larger, thereby diluting values on a square foot basis.

Sydney ranks mid-table for mainstream values ($500psft) but ranks low for prime prices per square foot ($850), largely because prime Sydney properties tend to be much bigger than their international counterparts. Here the most desirable prime properties are often very large houses, rather than city centre flats.

Reputation for volatility

Mid-table Dubai continues to record extremely high price growth in its residential markets, with values up 22.8% in the first half of 2014 alone (click on fig. 9 to enlarge). Mortgage caps and the doubling of property transfer taxes from 2% to 4% appear to be having little impact on the market, perhaps because investors are aware of the fact that prices in the emirate are still 28.2% below their 2008 peak and, at the same time, rents are rising substantially (12% in H1 2014). As current price rises are taking place against a relatively recent backdrop of big price falls, Dubai is likely to retain its reputation for volatility.

Over the first half of 2014, London and New York’s residential markets performed strongly as recovery in the UK and US economies continued. Residential markets in both cities have been driven by domestic purchasers taking advantage of low interest rates. In both cities, strong prime markets have abated somewhat offsetting the gains at the lower end of these markets.

Tokyo’s residential sector continues to gain momentum after decades in the doldrums. Capital values here were up 3.1% in the first half of 2014, more than all the growth in the seven years since 2007. In Rio, residential property continues to show price growth, but at half the rates seen just four years ago. Meanwhile, inflation in Brazil is running at 6.5%, so house prices are falling in real terms.

At the other end of the spectrum, Shanghai, Paris and Singapore all posted price falls over the first half of 2014. Shanghai and Singapore are both feeling the effects of government cooling measures (as is Hong Kong, but falls in the prime sector here have been offset by gains in the mainstream markets). Paris, meanwhile, continues to suffer from relatively low demand in a sluggish eurozone economy.

Taken from
Savills World Research: 12 Cities - H2 2014