The latest analysis from international real estate adviser Savills shows that a booming tech sector has made San Francisco the most expensive world city for the average renter, at a cost of $651 per week, ahead of New York and Los Angeles.
London ranks fourth most expensive for mainstream rents, at an average of $496 per week, some $127 per week cheaper than San Francisco.
Hong Kong, which alongside London is known for having among the world’s highest capital values, ranks 9th for mainstream rents, at an average of $453 per week, though with rental growth of 13.2 per cent last year, Hong Kong could join the top five this year.
Paris continues to represent relative value on the world stage, with average rents a third cheaper than San Francisco. In the context of Europe, it is 14 per cent cheaper than London and 12 per cent cheaper than Dublin.
A top ten of world cities ranked by prime rental values looks very different. New York ranks most expensive, with an average $3,257 per week, around five times the mainstream average, and almost $566 per week more expensive than second place Tokyo.
“Our analysis tells us, perhaps counter-intuitively, that the cities that are most expensive to buy in are not necessarily the most expensive to rent in. Hong Kong mainstream house prices are now around $1,515 per square foot, almost double the San Francisco average, but its mainstream rents are some 30 per cent cheaper,” says Yolande Barnes, Savills head of world research.
“San Francisco’s story is one of increasingly high demand from tech-savvy millennials who continue to flock to the city against a market that struggles for stock because rent controls act as a deterrent to new landlords. Ironically, the controls that are advantageous for existing tenants actually contribute to rising rents for new tenants”, says Yolande Barnes.
The story in Dublin, New York and Los Angeles is also one of strong demand from a growing population and limited supply.
In Dublin, a buoyant domestic economy and constrained sales market during 2017, drove mainstream rents up by 5.7 per cent, making this the fifth most expensive city for the average mainstream market household rent. At $481 per week, rents are now 40 per cent above their 2011 low and, perhaps surprisingly, on par with average rent in London.
“Investors and occupiers would do well to note the anomalies in the rental market. Some cities are ‘investors’ markets’ having seen strong rental growth, high rents but relatively low capital values. Rental yields are high in these cities”, continues Barnes.
“Others are low yielding. This is good for tenants in cities such as Hong Kong, as they’ll likely pay less for rent than for a mortgage, but not so good for investors unless there is the prospect of capital growth”, says Barners.
She says that where yields are still relatively high, in Paris and Chicago for example, there is the prospect of further yield compression and consequent asset growth. Lower net yields in Sydney, Hong Kong and London make capital growth less likely without rental growth.
Prime rents – a different order
New York tops the table for prime, or luxury, rentals at $3,257 per week (over five times the mainstream rent). A raft of new supply in the prime segment has boosted the quality of prime rental markets in New York and so boosted rents overall, but concessions are increasingly offered to fill new buildings.
Tokyo, which doesn’t appear at all in the top ten for mainstream rents is the second most expensive global city for prime rents, at $2,747 per week.
London and Hong Kong follow, at $2,407 and $2,393 per week, respectively and are higher up the table for prime than mainstream.
Savills expects Hong Kong to overtake London in 2018 as rents are rising there but falling in London.
Amsterdam and Dubai also feature in the prime top ten, but not in the mainstream. This reflects demand for prestigious properties from global renters in these cities and the fact that a premium is being paid for the relatively rare stock.
Amsterdam’s prime rents increased by 19.8 per cent in 2017, putting it fifth at $1,940 per week. A major and growing hub for the European headquarters of multi-national companies, rents have been driven up by relocating expats coupled with a shortage of stock.
Two Chinese cities feature in the top ten, Beijing and Shenzhen, with prime rents of $1,699 and $1,444 per week respectively. They also attract global, premium tenants (particularly as overseas residents are unable to buy) and the prime stock remains relatively rare enough to command a premium.