New research into the high-end international lettings market reveals that renting executive accommodation in so-called Old World cities such as Paris, London and New York can be up to four times more expensive than in emerging centres such as Shanghai and Mumbai.
A typical chief executive managing regional operations in a multinational would pay £20,400 a month in rent for a high-spec modern home with staff accommodation in the heart of Paris. A similar property in Shanghai would be £4,450 a month. In London, the monthly cost would be £19,650 compared with £4,550 in Mumbai.
“The high cost of renting in Old World cities is a function of a limited amount of ultra-prime stock with restricted scope for growth in the shape of new homes,” says Yolande Barnes, head of research at property consultancy Savills and author of the Savills World Cities Review, to be published on March 20.
Barnes’s analysis looks at 10 business cities and uses real-life case studies to create three models of corporate renter. The first is the chief executive at a centrally-located high status address, equivalent to a central business district. The second is a senior director – either a relocated expat or someone appointed locally – living with a partner or family in a prime location. The third is an administrative employee, living with a partner and children in a modest home on the fringe of the city.
While the high-end lettings sector remains strong, the Savills survey has mixed messages. Barnes says: “A few years ago almost all the cities showed similar rental yield, around 5.5 per cent per annum gross. Now it’s more varied and it’s not the prime sector but the mainstream markets – where purchase costs are relatively modest – that provide higher yields. Capital appreciation at the prime and ultra-prime end has led to reductions in yields.”
Across London, for example, average rental yield is 5.2 per cent but in prime areas such as Mayfair and Knightsbridge the figure is just 4.4 per cent. In Singapore, the citywide yield is 4.1 per cent whereas in the Central Business District it dips to 3.2 per cent.
“Weaker rental growth seems to have been concentrated in prime areas where CEOs and some directors are likely to live,” says Barnes. “The top end of Hong Kong, Paris, Singapore and Tokyo have been weak, perhaps reflecting falls in the level of corporate activity.”
Investors’ rental income, however, is much higher from prime properties: typical rental costs for an administrative employee living with their family ranges from £2,400 per month in New York to £750 in Mumbai and £300 in Shanghai.
Local factors can have a significant impact on high-end rents as in Hong Kong, where a 15 per cent Buyer’s Stamp Duty has been introduced for non-permanent residents plus foreign and local companies. Kate Everett-Allen, Knight Frank’s international research analyst, says: “Along with the extension and tightening of the existing Special Stamp Duty, this is likely to push more would-be buyers into rental accommodation.”
Knight Frank, which undertakes its own quarterly survey of 16 prime world cities, says average rents have risen 2.7 per cent in the year to September 2012 but are now 13.5 per cent higher than at their international financial crisis low in spring 2009.
Savills says the largest rental growth it recorded in 2012 was in a part of Mumbai where a new metro link cut travel times from some northern and western suburbs to the centre from two hours to 20 minutes. As a result high-end rental values in Andheri, an affluent suburb with 1m inhabitants, have risen by as much as 50 per cent in just one year.
“Although still very inexpensive by the standards of most major international cities, Mumbai is a good illustrative example of how infrastructure will drive a global rental market. Over time this will play into the hands of New World cities, which have space and often the funds to improve transport, telecommunications and other links,” says Savills’ Yolande Barnes.
Mumbai and other new global hubs such as Shanghai, Moscow and Sydney have seen high growth for rental accommodation in recent years – and high capital appreciation as investors piled in – but Barnes insists these are not potential market bubbles.
“These locations now behave like big power-league cities. Several are no longer building at a remarkable rate and I suspect they will mirror Old World cities, which make sure the demand and supply of rental accommodation are roughly aligned,” she says.
The key, according to Barnes, is for locations to avoid being threatened by an oversupply of homes leading to a swift deflation of rental values.
That risk is minimal in land-constrained Old World cities with few opportunities to build but is, perhaps, a bigger challenge for newer locations tempted to create more homes to tap the lucrative rewards of the high-end rental market.