Knight Frank forecast bumper prime office rental growth in a raft of cities; it said investors are travelling further afield to seek returns, and asked “Generation Y” what it thinks are the most and least affordable cities.

Knight Frank, the global estate agency firm, is unafraid to do anything by halves, it seems. In three reports out today, it forecast bumper prime office rental growth in a raft of cities; it said investors are travelling further afield to seek returns, and asked “Generation Y” what it thinks are the most and least affordable cities.

Starting with the Generation Y (people born between 1975 and 1995) question, Knight Frank’s survey of this population cohort showed that Hong Kong emerged as the least affordable city whilst Frankfurt topped the list for affordability. All the seven Global Cities in Asia Pacific fall below top 10 on the Knight Frank index. The results of the report’s Cost of Living Index shows that young graduates based in Frankfurt have the most disposable income, with around 60 per cent of their net salaries left at the end of every month, compared to 4.61 per cent deficit for a Hong Kong graduate. Second and third on the affordability list, respectively, were Berlin and Paris. London came in at 13th, and Singapore at 16th.

Knight Frank has compiled the Cost of Living Index for young graduates in the districts surrounding the CBD, using variables including graduate starting salary, cost of rented accommodation and utility bills as well as the cost of a pint of beer, a coffee and groceries. The report analysed the cost of living in the emerging districts surrounding the world’s traditional central business districts of the Global Cities such as the areas surrounding Square Mile in London or New York’s Downtown.

Global cities
In its second report, the organisation examined the impact on the office markets of more than 1.1 billion new city dwellers forecast over the next 15 years. The increase in urban living in the world’s top cities will see prime office rents reach record highs by the end of the decade, it said. In its Knight Frank Global Cities Index, tracking the prime office rents in 15 Global Cities (of which six are in Asia Pacific), it forecasts growth of 19.9 per cent over the next five years. The Index is forecast to rise above its pre-global financial crisis peak sometime in mid-2015.

Over the last five years, to the end of 2013, eight of the 15 Global Cities registered negative growth in office rents; five of these cities were in Asia. Singapore and Madrid which bottomed the list during this period 2008-2013 (year-end) demonstrated the greatest rental volatility.

Looking forward, Singapore climbs 10 places to take the 4th position in the 2014-2019 (year-end) rental forecasts (top for Asia Pacific), whilst Madrid climbs 13 places to emerge second in the rental forecasts, behind San Francisco which has topped the chart throughout the decade.

“Premium pricing for real estate is found in those cities with the most high value knowledge workers, which consequently attract the world’s leading corporations. These are the ‘Global Cities’ and they are impossible for a property investor or developer to ignore due to their size,” James Roberts, head of commercial research at Knight Frank, said in the report. “The economy of Tokyo is bigger than that of Spain, while London’s GDP is greater than that of oil-rich Saudi Arabia. If the 15 Global Cities profiled in this report were combined into a single country, it would boast the world’s third largest economy and have the sixth largest population,” Roberts said.
 
Restricted supply of new office stock in conjunction with this heightened demand for commercial space will see vacancy rates diminish in all the top 10 cities globally by 2019 with the average vacancy rate at 6.3 per cent, down from 7.8 per cent in 2014. Vacancy rates in Tokyo and London will drop to just 3.9 per cent and 4.4 per cent respectively in 2019 – lowest among the 15 Global Cities.

“Our data illustrates the opportunity for property investors and developers, who are in a position to exploit the growing trend for urban living across the globe. There was $202 billion of global commercial real estate investment in 2009 and we forecast this amount to increase to $606 billion in 2015, as just a taste of market activity to come,” Roberts added.

Residential forecasts
A mixture of alternative global locations such as Bangkok, Dublin and Nairobi and new locations in established cities such as New York, Los Angeles, Munich and Shanghai will offer the best returns in 2015, according to Knight Frank’s 2015 Prime Residential Price Growth Forecast, the third of the reports out today.

“With the macro-economic environment set for a shift away from stimulus measures in 2015 we believe a renewed focus on spotting micro-market opportunities is set to take centre stage. The ability of investors and developers to enjoy healthy returns from the residential market from 2015 will require a greater investment in the search for outperformance. In lots of markets, which have prices well ahead of pre-crash peak levels, average returns will be less exciting in the next five years compared to the previous five,” Liam Bailey, head of research at the firm, said.

“While the ever popular global hubs are set to take the lion’s share of this investment, we also think 2015 will see a growing appetite for alternative markets and more speculative plays from investors. Safe-haven investors who might previously have only considered established market neighbourhoods are now looking for new market opportunities in places like London, Sydney, New York, Miami and Vancouver,” he said.

The firm listed the following 10 markets worth watching:

New York – Williamsburg (Brooklyn)
Tokyo Toyosu – Kachidoki Bay-Area
Sydney – Barangaroo
Paris – 16th Arrondissement
Cape Town – Cape Town CBD
Hong Kong – Kowloon West
Singapore –Tiong Bahru
Nairobi – Runda and Gigiri
London – Victoria Park
Dubai – Business Bay