x Abu Dhabi, UAESunday 23 July 2017

Mumbai property tops global cities on price; Singapore wins on value

While Mumbai property might be low in actual cost, the city ranks poorly in terms of value for money.

Residential buildings in the Grange Road area of Singapore. The city-state offers businesses the best property-rental value compared with the size of its economy, according to Savills. Photographer: Nicky Loh / Bloomberg News
Residential buildings in the Grange Road area of Singapore. The city-state offers businesses the best property-rental value compared with the size of its economy, according to Savills. Photographer: Nicky Loh / Bloomberg News

Mumbai property, both residential and office, ranks last in a survey of the top 10 global cities, making it the least attractive investment for global investors, according to Savills, the international property adviser.

In its latest World Cities Review, the property company ranks New York as the world’s second most expensive city to rent business and residential space for employees, behind Hong Kong, and replacing London.

Mumbai, on the other hand, is the lowest in absolute cost, but also has the least value for money, unlike Singapore, which offers businesses the best value accommodation in relation to the size of its economy, according to Savills.

In its “value for money” ranking, Savills measures accommodation costs against city GDP per head, which is taken as an indicator of the income potential for businesses located there.

By this measure, Hong Kong, where total accommodation costs are almost four times those of Mumbai, actually looks three times cheaper than Mumbai, where locating an international business might be viewed with regard to market volume and labour availability rather than premium revenues, said Savills.

This makes Mumbai property look very fully valued, particularly as the Bric economies are experiencing an economic slowdown and rival economies are emerging as sources of low-cost labour.

On the other hand, Singapore’s costs, although ranked sixth in the world, are the cheapest of all the world cities in relation to the GDP per head in that country. In other words, the revenue that a corporation is likely (not guaranteed) to drive out of a business located in Singapore is much higher in relation to its employees’ real estate costs than in any other city on Savills list.

Ranked in this way, Singapore is less than half the cost of Hong Kong and nearly five times cheaper than Mumbai.

“Headline per square foot office rents are a misleading indication of the total real estate costs faced by relocating companies,” said Yolande Barnes, director of Savills world research.

“The value of real estate is higher where more corporate revenue can be generated.

“In other words, it is worth paying more to accommodate an executive team in Singapore with its high GDP than in the low GDP Mumbai.”

Residential and commercial rents have been growing more modestly than capital values in many cities in the Savills index. While rents reflect the fundamentals of demand, capital values are a good indicator of investor activity.

Savills predicts a profound impact on property values in most emerging, and recently emerged, economies, because of the economic slowdown.

“In fact, we are seeing a rebalancing in the performance of real estate in the old world with the new world as these changes occur,” said Ms Barnes.

For instance, worldwide, prime office rental growth appears to be levelling off. This has been led by more pronounced falls in rents in some “new world” cities and steady growth in the “old world” cities. Old world prime office rents have been picking up since late 2009, and are now 3 per cent above their December 2008 values.

By contrast, new world prime offices, which had benefited from some recovery between 2009 and 2011, have since wobbled downward and now stand 25 per cent below their December 2008 levels.

While this seems to be a case of global investors heading towards old world, “safe haven” property assets, Savills said, it also raises questions over the fundamentals of demand and supply in many new world locations, notably Singapore, Mumbai and Moscow – especially in the prime sector.

When it comes to housing, the consistent growth in all cities (except Tokyo) of mainstream residential rents shows that growing populations and limited space are the driving fundamentals of many world cities. Hong Kong (45 per cent), Sydney (32 per cent) Mumbai and Shanghai (27 per cent and 25 per cent) have experienced notable rent increases in mainstream residential housing since 2008.

To understand the true appeal of residential as an asset class in each city, Savills compared the gross rental income that investors receive in each city “net of gilts” (10-year government bond rates in Savills figures). This gives a measure of residential yields across its world cities, taking the return on 10-year government bond yields in each country, away from gross rental returns.

This measures the extent to which real estate income is performing against the local risk environment. Savills findings reveal that some world cities, particularly in the “new world”, and most notably Moscow and Mumbai, look overvalued. By the same measure some old world cities look good value.

New York, for instance, according to Savills, now offers the strongest gross residential yields, at 6.2 per cent, while Mumbai offers 3.4 per cent. However, Mumbai’s residential yield (gross) net of 10-year government bond yield is at negative 4.2 per cent.

In other words, a moderately negative rental growth in Mumbai, combined with very low net yields, means that this market will be unlikely to be subject to substantial investor activity and capital growth in the near future, according to Savills.