London
Heart of the UK economic recovery, but rising rents put pressure on affordability
What does the future hold for the rapidly changing global real estate market? We take a look at how our world cities will perform in 2020.
London is arguably the most ‘international’ of the 12 world cities we monitor, but it risks becoming less competitive due to strong sterling and high real estate costs. Residential prices have risen 18.4% in the past year, buoyed by a strong domestic market and buyers and investors from around the world. At the heart of the UK’s economic recovery, London’s outperformance is anticipated to continue.
2020 vision
Saturation of prime: The safe haven credentials of London real estate are well rehearsed and its best residential and commercial assets have attracted investors seeking capital growth and/or the storage of wealth. But we anticipate that investors will be motivated by income returns as prime looks fully valued. This means greater interest in higher-yielding secondary locations in Greater London.
Affordability: London now tops our live/work index by costs of renting commercial and residential property. Rising rents are putting pressures on affordability, which is a threat to London’s global competitiveness. For example, the availability of low-cost office space in and around Silicon roundabout, coupled with affordable residential accommodation, helped put the capital on the technology map But gentrification has priced out new start-ups and the vitality of central London locations are at risk as they become too expensive for the types of occupiers that made them attractive in the first place.
Infrastructure: Crossrail 1 will provide a 10% increase in London’s transport capacity, but with London’s population set to grow by another million by 2021, Crossrail 2 cannot come soon enough. Crossrail 1 has already unlocked a slew of large development sites in east London and Crossrail 2 will do the same for parts of north and south London.
Hong Kong
Becoming more competitive as real estate costs and the HK$ fall
Hong Kong remains by far the most expensive city in which to buy residential property – 40% more expensive than London – but the gap is narrowing. Prime residential values have been hit hardest as cooling measures take effect, while rents are sliding due to weakening demand from the corporate sector. In the office markets, finance-focused Hong Kong has suffered as firms downsize and consolidate. As rents have risen much less than capital values, a period of consolidation is required if yields are to stabilise.
2020 vision
Saturation of prime: Despite a recent record listing of a Victoria Peak property, at $22,600psft, prime prices fell by 2.7% in H1 2014. However, the market is polarised and the value of mainstream property has increased by 8.5%, a trend we expect to continue.
Infrastructure: The Government’s capital spending between 2013 and 2018 is estimated to reach more than HK$70 billion per year, far exceeding the average annual capital expenditure of about HK$40 billion. A 26-mile Hong Kong- Zhuhai-Macao Bridge, subway extensions and a new high-speed rail link are planned.
Economy: If and when China opens up economically, Hong Kong may lose its role as China’s bridge to the wider world. There are calls to diversify Hong Kong’s economic base, dominated by financial services, tourism, trading and logistics, and professional services.
New York
Rents exceed former highs, but rising taxes could be a burden
New York rode out the global financial crisis better than much of the rest of the US. Prime residential prices are back at 2007 levels, while rents have exceeded former highs, underpinned by solid occupier demand (68% of households rent). New York is a key global tech city and a shift in occupier demand is shaping its corporate office market.
2020 vision
Rising costs: In the medium term, rising mortgage rates will dampen price growth in the residential markets. Rising taxes will also put a burden on the city’s real estate sector. New York’s mayor, Bill de Blasio, has pledged to tackle income inequality in the city and is proposing overhauling the property tax system to shift the burden to higher value property.
Land supply: With more people choosing to live and work in New York, the city faces growing pressure on its limited land. The Big Apple is investing in urban renewal, supported by investment in new infrastructure. Hudson Yards, providing 12.7 million sqft of office, residential and retail space, is estimated to complete in 2018.
Demographic change: New York’s population is changing as the city appeals to empty nesters and families, complementing the growing ranks of young professionals. No longer a stop-gap until a move to the suburbs, occupiers are now looking for new standards of amenities. For example, there is a growing trend toward dedicated space for pets in Manhattan’s new condo schemes.