New world cities outperform old world

There are 10 world cities in a class of their own when it comes to residential real estate, according to international property advisors Savills. Average values across the newly created World Class Index of premier global residential property locations have risen 77% since 2005, despite the intervening financial crisis or two, with growth of 6% in the first six months of 2011.

But the index average hides big differences between emerging flash new-world economies and the indebted old-world ones.

Sydney ranks alongside Tokyo, London, Paris and New York as “old-world” economies, while Shanghai, Singapore, Hong Kong, Moscow and Mumbai are the exciting “new-world” emerging economies, according to Savills.

A clear gap can be seen.

Tokyo, London, Paris, Sydney and New York grew by 32% since 2005

But the “new-world”, or emerging, economies of Shanghai, Singapore, Hong Kong, Moscow and Mumbai grew, on average, by 123% over the same period.

And within the old world the more cosmopolitan cities fared much better than those that restrict foreign purchasers.

“It becomes apparent that the debt-induced crisis of 2008 was suffered most by the old-world cities and not the new-world ones,” says Yolande Barnes, head of Savills Residential Research.

“The biggest old-world value rebounds have been experienced in the cities most open to new-world investment, notably London and Paris.”

She concludes that for wealthy, globally footloose investors, prime residential property in London and Paris will remain the favoured safe haven for the wealth created in the new-world economies.

“Increasingly, our cities have more in common with each other than with the domestic, mainstream markets in which they operate,” Barnes says.

“Their future performance will depend upon their continued appeal as places to live and work as well as to invest.

“Meanwhile, old-world cities like Tokyo and Sydney are geographically very well placed to benefit from investment from frustrated Chinese and other Far Eastern investors, but they will need to open up their markets to such investors to trigger this.”

Source: Savills

The report notes a shift has occurred in the global real estate premier league since 2005.

Hong Kong remains the most expensive, and values are now 107% above the 10 World Cities Index average, and 63% more expensive than second-place London.

Singapore has grown 123% over the past five and a half years, so it has come up the ranks from seventh position in 2005 to fourth in 2011.

“With its strategic location in a time zone between Europe and North America, Hong Kong has emerged as one of the world’s elite financial centres, and as a gateway to China has prompted increased capital and talent inflow over the past decade,” says Simon Smith, head of Savills research in Asia Pacific.

At the other end of the scale, Mumbai is the least expensive world class city, costing 43% less than the average of all the 10 cities. But it has grown by 154% off its low base, and recorded the highest rate of growth over the period, marginally ahead of Shanghai’s 143%.

On an individual basis, cities have performed very differently.

Against Mumbai, Singapore and Shanghai’s stellar growth, New York grew by just 7% and now, along with Sydney, represents the best value in the old world, Barnes says.

The report noted there was little uniformity in the pattern and timings of price movements as some cities had grown steadily over the whole survey period while others have shown pronounced peaks and troughs – at different times.

Savills Research used a basket of properties required to house an executive group of people that might start up or expand a global business in any country, where real estate costs become an important element of doing business.

Capital Value League Table

Source: Savills Research

Fundamental visitor business and relocation activity in each city was revealed in Savills International rental rankings that show that of the 10 cities, London has the highest rents and Mumbai the lowest.

For the top five most expensive rental cities, London, Paris, Hong Kong, Tokyo and Singapore, demand is fuelled by domestic, as well as corporate demand as would-be purchasers are pushed into the rental sector due to credit restrictions. Rents have moved, on average, across all cities at a slower pace than capital values, thereby suppressing yields.

There is an old world/new world difference in the growth of rents, but it is not as pronounced as with capital values – 3.6% new-world rental yields compared with 5.1% old-world rental yields. Savills suggests this highlights that strong capital-growth-motivated investment activity is driving capital values in the new world and means that yields are moving in much faster in these cities. In consequence, it might be said that there is a stronger case for rental-return-motivated investment in the cities of the old world.

Rent League Table

Source: Savills Research