PRIME GLOBAL RENTAL INDEX CONTINUES NEGATIVE PERFORMANCEKnight Frank’s Prime Global Rental Index fell by 1.1% in 2015 with equity market volatility and economic fragility in emerging markets driving rents lower. Taimur Khan examines the latest figures.

RESIDENTIAL RESEARCH

PRIME GLOBAL RENTAL INDEX

TAIMUR KHAN Senior Research Analyst

“ Weak equity markets and record low commodity prices contributed to the index’s weaker performance in 2015.”

Follow Taimur at @taimur124

For the latest news, views and analysis on the world of prime property, visit Global Briefing or @kfglobalbrief

Knight Frank’s Prime Global Rental Index, which tracks the change in luxury residential rents across 17 cities globally, fell by 1.1% in 2015, down from growth of 2.5% in 2014.

The performance of prime global rental markets is intrinsically linked to each city’s employment market and in particular the professional services sector. Muted performance in equity markets and record low commodity prices contributed to the index’s weaker performance in 2015.

Guangzhou remained the strongest performing city recording annual rental growth of 5.3% in 2015. This is despite market conditions being favourable for buyers with record low interest rates and a relaxation of financing for second homes and foreign buyer restrictions in China last year.

Geneva displaced Moscow as the weakest performing market in 2015, with rents falling by 7.1% annually, the downward pressure on rents being caused in part by strong supply.

Some of the world’s top financial centres have shown divergence in terms of the performance of prime rents. Rents fell in

Hong Kong (0.8%) and Singapore (3.8%) whereas Tokyo, New York and London recorded a rise in prime rents year-on-year of 3.3%, 2.4% and 0.7% respectively.

2015 saw large regional variations in terms of rental performance around the world. North American cities recorded the strongest rise in prime rents, up 2.8% on average whilst Europe saw the largest decline, with average prime rents decreasing by 3.5% (figure 4).

Since its post financial crisis low in Q2 2009 the index has increased by 19%. From Q1 2007 to Q3 2008, prior to the financial crisis, the index averaged increases of 9.1% per annum; however post Q2 2009 the average annual change has diminished to 2.5%.

On the upside, 2015 saw a partial resolution to the ‘Grexit’ crisis and the Asian equity markets stabilised. In 2016, ‘Brexit’ looks to be fuelling further uncertainty within Europe, with business activity hitting a 13-month low, according to the Markit’s European composite Purchasing Managers’ Index. In markets which are already reflecting on negative interest rates, low commodity prices and a slowdown in China, further uncertainty in the world’s key prime rental markets is likely.

Results for Q4 2015The index fell by 1.1% in 2015, partially reversing the rise of 2.5% in 2014

Weak equity markets and record low commodity prices contributed to the index’s weaker performance in 2015

Guangzhou tops the annual rankings for a second consecutive quarter

On a regional basis, North America recorded the strongest rise in prime rents, up by 2.8% on average

Over 50% of the cities tracked by the index recorded a decline in prime rents in 2015

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Prime Global Rental Index Q4 2015 Annual performance over the last five years 12-month % change

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FIGURE 1

PRIME GLOBAL RENTAL INDEX Q4 2015

Source: Knight Frank Research, Miller Samuel/Douglas Elliman, Ken Corporation

FIGURE 3

Prime residential rental growth by city Annual % change to Q4 2015

Source: Knight Frank Research, Miller Samuel/Douglas Elliman, Ken Corporation

FIGURE 4

Prime rents by world region Average annual % change to Q4 2015

-0.8%

MID

DLE

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ST

-1.8%

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E

-3.5%

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ICA0.6%

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2.8%

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SINGAPORE

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TAIPEI

TORONTO

BEIJING

1.6%

CAPE TOWN

MOSCOW

ZURICH

VIENNA

TEL AVIV

NAIROBI

FIGURE 2

Prime Global Rental Index, Q4 2015 Annual % change to Q4 2015

Geneva

Moscow

Nairobi

Singapore

Zurich

Beijing

Vienna

Hong Kong

Tel Aviv

Taipei

London¹

Cape Town

Shanghai

New York

Toronto

Tokyo²

Guangzhou

6420-2-4-6-8 8

PRICE PERFORMANCE BUYER NATIONALITIES CURRENCY IMPACT

RESIDENTIAL RESEARCH

ITALY INSIGHT 2016 ASSESSING MARKET CONDITIONS ACROSS ITALY’S PRIME SECOND-HOME DESTINATIONS

Italy Insight Report 2016

FIGURE 1

Housing starts and completions

Source: Knight Frank Research

THE EU REFERENDUM AND THE UK HOUSING MARKET A referendum on the UK’s membership of the European Union has been a possibility since January 2013 when David Cameron pledged to hold a vote on the issue. This possibility became a certainty with the election of a majority Conservative government in May last year and the subsequent announcement that the vote will be held on June 23rd 2016.

Pre-referendumRising economic uncertainty due to the unknown implications of the upcoming EU vote is the key issue. This lack of clarity could lead to fewer residential transactions and could even weigh on development volumes.

Can we see evidence of these trends in existing market data? Figure 1 confirms that both transaction volumes and development starts have seen healthy growth since David Cameron’s 2013 referendum pledge, and again following the Conservative Party victory in May last year.

Despite the resilience of the market to date, experience from the 2014 Scottish Referendum shows that we ought to expect a slowdown in housing market activity as we get closer to the poll date. The extent

Sales volumes and new construction starts have risen steadily since 2013, confirming the EU referendum announcement has not, so far, led to a slowdown in housing market activity.

Price growth in the prime central London market has slowed over the last year, especially when compared to mainstream markets, but this is the result of recent stamp duty reform rather than the EU referendum announcement.

of this slowdown is, in reality, guesswork at the current time.

One issue we have seen develop in recent weeks is the weakening of the pound. This trend has potential implications for the central London market, where foreign home buyers are more active. If anything the weakening of the pound could provide a short-term boost to demand in the Capital.

Post-referendum There is no doubt that a clear “remain” vote would remove immediate economic uncertainty and market activity might be expected to recover any lost ground relatively rapidly, this was certainly the experience in Scotland following their referendum.

Key headlines, March 2016Economic uncertainty due to the unknown implications of the vote is the key issue

Transactions and development volumes have risen steadily since 2013

The mainstream UK housing market is primarily driven by domestic dynamics

An exit from the EU would not affect the demand/supply imbalance which is a key feature underpinning current housing market trends

RESIDENTIAL RESEARCH

EU REFERENDUM UPDATE

FIGURE 2

What has happened to prices?

Source: Knight Frank Research / Land Registry

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“ Experience from the 2014 Scottish Referendum shows that we probably should expect a slowdown in housing market activity as we get closer to the poll date.”

EU Referendum Update - 2016

DATA DIGEST

RECENT MARKET-LEADING RESEARCH PUBLICATIONS

Knight Frank Research Reports are available at KnightFrank.com/Research

RESIDENTIAL RESEARCH

Liam BaileyGlobal Head of Research +44 20 7861 5133liam.bailey@knightfrank.com

Taimur KhanSenior Research Analyst+44 20 7861 1436taimur.khan@knightfrank.com

PRESS OFFICE

Astrid Etchells+44 20 7861 1182astrid.etchells@knightfrank.com

The Knight Frank Prime Global Rental Index is an important resource for investors and developers looking to monitor and compare the performance of prime residential rents across key global cities. Prime property corresponds to the top 5% of the housing market in each city. The change in prime residential rents is measured in local currency. The index is compiled on a quarterly basis using data from Knight Frank’s network of global offices and research teams.

PRIME GLOBAL RENTAL INDEX Q4 2015

Chinese Outbound Investment Feb 2016

Knight Frank Prime Global Rental Index, Q4 2015

Rank City World region

12-month % change

(Dec 14-Dec 15)

6-month % change (Jun 15-Dec 15)

3-month % change

(Sept 15-Dec 15)

1 Guangzhou Asia Pacific 5.3% 3.7% 0.2%

2 Tokyo² Asia Pacific 3.3% 5.3% 5.4%

3 Toronto North America 3.3% -0.1% -0.2%

4 New York North America 2.4% 9.0% 9.9%

5 Shanghai Asia Pacific 1.9% 1.4% 0.1%

6 Cape Town3 Africa 1.6% 0.0% 0.0%

7 London¹ Europe 0.7% -0.9% -1.1%

8 Taipei Asia Pacific 0.0% 0.0% 0.0%

9 Tel Aviv Middle East -0.8% 0.3% 1.2%

10 Hong Kong Asia Pacific -0.8% -2.7% -2.2%

11 Vienna Europe -1.3% 2.0% -1.6%

12 Beijing Asia Pacific -1.5% 0.3% 0.7%

13 Zurich Europe -3.2% -7.7% -1.6%

14 Singapore Asia Pacific -3.8% -0.7% -0.4%

15 Nairobi Africa -5.1% -5.1% -5.1%

16 Moscow Europe -6.5% 15.0% 8.0%

17 Geneva Europe -7.1% -4.4% -4.4%

Source: Knight Frank Research, Miller Samuel/Douglas Elliman, Ken Corporation1 Data is based on all rental contracts agreed above ¥ 300,000 or where the internal area is 30 tsubo+2 London: new data is available for prime central London here³ Q3 2015

The Wealth Report - 2016

2016

10th Edition

THE WEALTH REPORTThe global perspective on prime property and investment

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