Established world city real estate markets are going to see lower capital growth in the next decade as interest rates rise, so income will be the key reason for investing, according to international real estate advisor Savills.

In its new flagship publication, Impacts: the future of global real estate, Savills says risk needs to be measured differently, as security and scale of income becomes the major driver. The firm identifies cities which are resource rich, young and fast-growing, economic powerhouses or at low risk of natural disasters as ones to watch for the next decade. According to the report, the ability of cities to attract people and talent pools will be a key indicator of income security in the next 10 years. The report also shows positive performance of Vietnam real estate market, Ho Chi Minh city in particular, said Mr. Troy Griffiths, Deputy Managing Director Savills Vietnam. “Once again HCMC makes the top lists, this time it’s resoundingly so, with overwhelming high places in the categories of Cities most likely to see rental growth (#3), City investment prospects (#5) and City development prospects (#2).  This is an annual long running survey across a multitude or sophisticated property investors that demonstrates the strong sentiment towards HCMC and Vietnam as a highly favorable investment destination.  This is underwritten by the #1 position across all surveyed cities as BUY options for office, retail, industrial and residential assets.”

Savills has analysed rental growth in different real estate sectors in world cities and plotted where each stands on the new Savills rental wave. It identifies cities and sectors which investors may want to take look at more closely for security of income and potential rental growth. Cities in the ‘early upswing’ are described as ones for investors to watch as they have scope for further rental growth, but Savills warns that intense competition for stock may lead to yield compression and high prices in some locations, while others are difficult for international investors to access.

  • Prime office growth has been highest in San Francisco (+99%), Shenzhen and Beijing (both +71%) and London West End (+69%) since 2008. This leaves these city sectors near the top of the rental curve: in late upswing, on a high plateau or in early downswing.
  • In Singapore, double digit falls have been seen in prime offices (-26%), residential (-25%) and prime retail (-15%), leaving these sectors in or near the trough of the rental wave.
  • Hotels in Shanghai, prime industrial in Melbourne and Shenzhen residential are examples of early-stage rental growth in the current cycle suggesting further potential, but investors may face tough competition and high prices for assets in these markets.
  • Shenzhen has experienced the most rental growth in residential since the end of 2008 (+82%).
  • New and growing economic powerhouse Jakarta is near the end of the late downswing phase of the cycle and potentially offers high rental growth, but with the greater risk of a young market in an emerging economy.
  • Established investment classes in world cities, e.g. prime offices in cities like London, Tokyo and San Francisco are at the top of the wave but may offer a safe harbour for investors as rents could remain on a ‘high plateau’ for some time.

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