Real estate professionals love reports. It seems everyday a new study is released on everything from broad, overarching investment trends to the minutiae of regional holiday homes. Sometimes the theses conflict, often they don´t. One thing that has emerged is the undeniable concentration of investment in urban areas and its trickle down effects. For better or for worse, right or wrong, the city is where it´s at in the coming years.
Global property consultancy Savills´ newest research report is 12 Cities, which breaks down the cost of locating employees for corporations. The combined cost of work and living space per employer per year may seem, on the surface, to be an arbitrary measure totally irrelevant to most of us. That couldn´t be farther from the truth. “This is our flagship on key trends,” explains Yolande Barnes, director of Savills World Research. “This is about world real estate and the themes that are emerging now are really visible in these 12 cities … the 12 where most real estate money is going.”
The world cities on Savills´ list were ranked on the cost of hosting staff, but the greater significance revolves around the ability for each centre to attract talent, resulting in a subtle influence on property values and prices. A great deal of that, in turn, is influenced by modern industries that are becoming more relevant than banking alone. Cities that are hot investment locations currently, such as Berlin, London and San Francisco, are hot because the element of serendipity is beginning to impress itself. “It´s all about the human interaction and that´s seen in the creative industries and tech industries as really valuable.” Barnes goes on to point out tech giant Google´s struggle to create a community vibe in Silicon Valley and largely failing has driven the corporation back to San Francisco and to revitalised King´s Cross in London for its UK offices: the 20th century car-based city is disappearing.
Savills´ 12 key cities are London, Hong Kong, New York, Paris, Tokyo, Singapore, Moscow, Sydney, Dubai, Shanghai, Rio de Janeiro and Mumbai. There are always people looking to rent in the 12, making what goes on in each a harbinger for investment trends and real estate patterns that will ultimately affect all of us.
The bulk of the world´s investment capital is heading towards the 12 locations, and “The money goes there for a reason that´s not just about the fundamentals. There´s a psychology of investing which we study quite a lot. These 12 are where we think the market and money trends play out.” No city exists in a vacuum, and macroeconomic, social and political events shape the markets. The Lehmann Brothers collapse, Olympic Games announcements and stamp duties are just some of the “events” that have exerted pressure on investors and occupiers — who ultimately drive the markets. Dominant industries and our collective lifestyle will also be among the future determinants. Specialised assets, like student housing and farmland, could easily fall into favour.
With the increased attention to farmland is, “The implication is that water and food supply become very important. The fear of the urban dweller has led some investors into what underlies it,” theorises Barnes. “Chinese investment is huge in Africa and that´s led to new routes to market, food producers that normally wouldn´t have that. It massively adds to land value. But the chase after farm land is part of the urbanisation story.”
On the Verge
Savills´ 12 key cities are exemplars of major real estate trends but there are others waiting in the wings. Among the rising star cities Barnes notes — for diverse reasons — are Dublin and Beirut, both recovery stories that benefited from extreme poverty 40 years ago that stopped demolitions and has made the city a social beacon and with good demographics and strong holiday/resort potential respectively; Miami, a gateway to South America without the risk; Chicago, home to more multinationals than any city in the US and primed to become a global city; Lagos for its “astounding human capital”; Panama City because of trade and its American style legal title; and, surprisingly, Melbourne for a long-term infrastructure outlook that Sydney doesn´t have. “It has the potential to take Sydney by surprise,” says Barnes.
Another future trend investors should watch out for is Asian-style mixed-use development becoming the norm in land-constrained locations. “What we might have to start seeing … is more thought paid to low intensity industrial estates making poor use of the land and the need for housing,” states Barnes. How to accommodate businesses and residences on the same bit of land has to be addressed. “I think incorporating the workshops and warehouses within the urban fabric and creating workable, liveable places that integrate the two is going to be the way to go.”
Finally, Barnes is a believer in the big picture, and that the high end of any sector can be overrated. Using small, relatively unappealing industrial structures as an example, she argues strong income streams and rental growth and high occupancy make them worth the effort, glamorous or not. “Everyone´s heart is with the anchor tenant. A 25-year lease from a blue chip company matters more … Government departments are considered the ultimate covenant but all you need is relocation and suddenly you´ve got the mother of all voids. Small businesses fail all the time but there´s always someone else to take their place. Mainstream residential is the same. People look too much at the building itself and not the quality of the income stream. There´s money in affordable housing as well.”