Tokyo is regarded as the most desirable city for investors who seek residential investment as measured by the yields they would give over UK government bonds (gilts), according to Savills, the property agency, while New York, Paris and London come second, third and fourth in this regard, respectively.

Savills, in a study of the global real estate market, said that residential rental growth in the world’s leading cities outperformed office rents in the first half of 2013, making residential real estate look a viable investment asset class.  But low-yielding cities, where house prices are not underpinned by rental income, could be overvalued.

In the rankings of world cities ranked by residential investment, Tokyo is first, followed by New York; Paris; London; Singapore; Sydney; Hong Kong; Shanghai; Moscow, and Mumbai.

Savills said a surprise is that Tokyo now also looks attractive for investors seeking income. 

To understand the true appeal of residential as an asset class in each city, Savills has compared the gross rental income that investors receive in each city “net of gilts”. 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, the firm says.

New York now offers the strongest gross residential yields, at 6.2 per cent, against US government bonds at 3.4 per cent. Rents are rising - up 2.0 per cent in the first half of 2013.  By way of contrast, gross yields in Moscow are also high, at 5.8 per cent, but well below the 7.4 per cent available on government bonds making the city’s residential assets look expensive – especially in relation to its relatively modest rental growth of 3.3 per cent in the first half of 2013.  New York offers a 3.6 per cent upside, whereas Moscow has a -1.6 per cent downside against gilts, Savills says.