Prime property rents grow at their fastest rate since Q2 2008

03 October 2011

Knight Frank analysts have presented the results of the first ever Prime Global Rental Index monitoring the dynamics of rent rates for elite residential housing in the most important cities of the world. The Index is compiled on a quarterly basis since Q1 2011 using data from Knight Frank’s network of global offices and research teams. It is made for investors, developers, landlords, and HR-managers (employers) who have the need to monitor and compare the performance of prime rental markets across key global financial centers.

The key findings of the Prime Global Rental Index for Q1 and Q2 2011 are listed below:

  • In the Q2 2011 the fastest growth rates of elite rent (8.9%) since Q2 2008 (14.7%) was recorded.
  • At the end of Q2 2011 Moscow is on the 12th place in terms of the dynamics of growth in rental rates for luxury properties (-1.6%), showing a positive trend as compared to Q1 2011 that equaled to -5.7%.
  • Zurich and London continue to top the rankings table, recording 18.2% and 15.2% annual growth respectively. In Q1 2011 the annual rate growth in these cities amounted to 18.2% and 16.9% respectively.
  • Hong Kong and New York recorded the strongest quarterly growth, with rents rising by 4.6% and 4.1% respectively in the three months to June 2011. In Q1 2011 Geneva recorded the strongest quarterly growth, with rents rising 8%.
  • Rents for luxury homes rose by 8.9% in the year to June 2011, this represents the fifth consecutive quarterly rise in global rents.
  • The global Index now stands 36.5% higher than its lowest point in Q1 2010 but still 30.0% below its market peak in Q3 2008.
  • Europe recorded the strongest performance of all continents over the 12-month period at 10.5% and the Middle East the weakest at -4.3%. In Q1 Europe also experienced the highest rental growth of all continents at 11.4%.

In annual terms rents increased by nearly 9%, the index’s strongest performance since Q2 2008 when rents rose by 14.7%. The recent growth represents a significant recovery, only two years ago prime rents were declining at an average rate of 17.2% per annum.

The rental markets’ changing fortunes can largely be explained by the global economic climate, the changing nature of employment conditions and in particular the health of a city’s financial service sector. It is no coincidence that the traditional financial centres of Zurich, London, Hong Kong and Geneva currently top the rankings for rental growth.

Given the close relationship observed between a city’s financial markets and its prime rental sector the recent renewed concern over EU debt, stock market volatility and weakening consumer confidence raises the question have prime rents peaked? At the moment it seems there is still some room for additional growth. In many of the main financial centres available stock levels are severely constrained. A number of western cities have low vacancy rates (Geneva’s currently sits below 2%) here, demand will need to weaken significantly before rents come under real pressure.

Who rents prime property?

Most tenants are wealthy individuals who are owner-occupiers themselves, but their need to rent is usually borne out of a job relocation, changing family circumstances, the need to accommodate children who are studying or with the aim of getting to know an area before deciding to buy.

There are other tenants – more evident in boom sales periods – who rent when a competitive sales market means they need to act fast and be chain-free to secure the best property. These prime tenants have been most evident in parts of Asia Pacific in recent years where capital growth has exceeded rental growth, although the margin is starting to shrink as deflationary measures start to take effect.

In our view, rents particularly in the Asian cities have further to go, rental growth here has been outstripped by average earnings growth in recent years.