London on rise but Beijing takes gold medal

By David Hutchings

With the eyes of the world focused on sporting and cultural achievement in London, we have taken a relatively informal look at the recent performance of global office markets.

Our approach involves measuring and determining the markets with the fastest value growth over the past year, the markets which have seen the strongest rental or yield recovery since the global downturn, and the markets that have sustained the highest actual values.

Cities were ranked according to six factors: the level of rental growth and yield change in the year to June 2012; the degree of recovery in rental values and yields since the market low-point in 2009 and 2010; and the actual rental and yield value achieved as at June 2012.

Medals have then been awarded to the highest three deciles of the ranking, with the top 10 percent awarded gold, the following 10 percent receiving silver and the third group bronze.

While property development, leasing or investment may not be a recognized sport, the Olympic Games rarely go unnoticed in the host city’s property market. London has been no exception, with occupier and investor demand rising most notably in the retail, hospitality and residential segments.

The office market has also been affected in terms of activity, sentiment and indeed supply and the image of Stratford as the Olympic Village fosters the growth of a new and vibrant submarket in London.

Nevertheless, our review of global office markets shows that London has some catching up to do in order to match the last Olympic host, Beijing. China’s capital tops our performance table, receiving a massive five out of six possible gold medals due to its fast-paced growth which has contributed to a strong recovery that has seen the city sustain some of the highest rental and capital values of any market in the world.

Following Beijing is San Francisco, benefiting from the growth of its technology base, while Moscow is next in line with high rents sustained by buoyant demand in its commodity-led economy. This has delivered a strong recovery following the 2008 to 2010 crash, when rents plummeted by over 50 percent.

After Moscow we have a tie between London and Shanghai, with the latter seeing the second highest rental recovery after Beijing, but with yields edging out in 2012, its capital value recovery has been less robust. New Delhi and Taipei are next in line, followed by Paris and Sao Paulo.

The Olympic host London enjoyed a much stronger and earlier recovery than most other markets globally after an admittedly more severe downturn, particularly by European standards, which wiped 43 percent off prime rental figures.

The popularity of cities like New York and Hong Kong helps them to sustain high values, but after a strong rental recovery in recent years, Hong Kong’s cycle is now beginning to turn and it has dropped down the medal table with its rents easing back after recent weaker absorption data.

New York is the most expensive U.S. market in terms of rent and capital value and the city has recently seen strong interest from global investors, as shown by the high degree of yield compression. Rental growth, however, has thus far lagged in its recovery, with what is still anticipated to be a strong cycle ahead being subdued in the short term by the slowing U.S. and global economies.

Excluding London and Moscow, Europe is underrepresented in the top 25 cities ranking, with only Paris, Oslo, Zurich and Geneva plus Kyiv joining them in the table. It may have been expected that the stronger German and Nordic cities would have ranked higher in the list. But these cities in general have seen a more limited recovery to date, largely because they witnessed a comparatively limited downturn during the credit crunch.

Looking at the constituent parts, America was the leading region for short-term growth, with North America ahead for yield compression _ with six of the top 10 global markets. Oslo is the only European representative while Asia saw Beijing, Kolkata and New Delhi make to the top 10.

When it comes to the actual rental and yield values, however, Asia leads with five out of the top ten global markets. Heavyweights like London and New York are also high up the list, while Paris and Swiss markets Zurich and Geneva round out the top 10. Europe in fact won half of its medals in this category, albeit most were silver or bronze.

While Beijing has outperformed its mainland compatriot cities Shanghai and Chengdu, it is not the top ranked global or even Asian market for values. Tokyo and Hong Kong are the most expensive in terms of rental figures, and Taipei and Hong Kong are the most expensive in relation to yields.

New York is the only market from the Americas to feature in the top 10 table for values. Sao Paulo is the strongest Latin American market in terms of rents in 18th place while Santiago serves as the top Latin American market for yields, ranking just 74th.

Finally, when it comes to the recovery that most markets have seen since the turmoil of the credit crunch, Asia again stands out, with aggregate office rental values up over 15 percent since 2009.

This was led largely by China, followed closely by Hong Kong, Indonesia and Singapore. India also features strongly for recovery as a result of rental growth rather than yield compression, with New Delhi being the stronger and higher value market. Kolkata has also staged a robust bounce-back and a number of other cities have seen good growth.

Overall, the recovery indicator was Europe’s worst category, with just three golds for the region: two to Moscow and one to London. Some Nordic markets have also recovered relatively well, led largely by Oslo, while Paris as well as top German cities has witnessed a tightening in yields, even if rents have yet to stage a strong bounce-back.

The Americas did well in the recovery segment, with Latin America the key driver led by Lima, Sao Paulo and Bogota. In North America a range of Canadian cities have performed well from a rent and yield perspective while in the United States, San Francisco aside, the recovery is much more led by falls in cap rates.

Interestingly, while Rio de Janeiro has seen a solid recovery and ranks in the top 40 for medals, overall, it failed to take a gold medal. Nevertheless, the strong fundamentals of Rio and Brazil as a whole point to a continuous progression up the global hierarchy ― and the passing of the torch from London to Rio for the 2016 Games will only help!

David Hutchings is the head of the European Research Group, Cushman & Wakefield.