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What was the highest yielding property in 2014
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What was the highest yielding property in 2014

Tranio.com has released a ranking of cities that are the most popular among global investors, and which in 2014 had the best housing and commercial property yields. We calculated total returns on properties by adding rental yield and capital growth.

Offices: the best yields are in US cities

Double-digit value growth was at times witnessed, with some cities hitting 20-30% capital growth and more.

San Francisco ranks as the highest-yielding office market. Colliers reports a rather modest rental yield of 4.58% in the city, however a JLL report reveals a 33% increase in office acquisition prices in Q4 2014 on a year ago. Rental rates are surging too – by 22.6% on the Peninsula, 8% in the city area and 2.2% in Silicon Valley. Knight Frank predicts a further 36.2% increase in rental rates in the San Francisco office market by 2019. Such rapid growth can be explained by high demand for office space from start-ups and multinational companies looking for leases. The total return in 2013 on the San Francisco office market was only 9.75%, compared to 37.58% in 2014.

Office yields in 2014Figures from CBRE, Colliers, Cushman &amp Wakefield, JLL

Rank City Rental yields,
%
Change
in capital
value, %
Total
return,
%
1 San Francisco 4.58 33.00 37.58
2 Los Angeles 5.50 22.00 27.50
3 Barcelona 5.50 21.60 27.10
4 New York 3.50 22.80 26.30
5 Madrid 5.50 19.00 24.50
6 Tokyo 3.30 19.30 22.60
7 Paris 4.00 18.10 22.10
8 Munich 4.20 10.00 14.20
9 London 4.50 9.50 14.00
10 Washington 5.28 8.00 13.28
11 Beijing 5.30 5.00 10.30
12 Dubai 6.75 3.10 9.85
13 Berlin 4.50 4.00 8.50
14 Toronto 5.50 2.00 7.50
15 Shanghai 6.00 1.80 7.80
16 Hong Kong 2.90 0.3 3.2
17 Zurich 3.20 −3.00 0.2
18 Prague 6.00 −7.90 −1.90
19 Moscow 8.50 −29.8 −21.3

Los Angeles is lagging a bit behind San Francisco. It has a higher rental yield of 5.5% and prices rose by 22%, which is less than a third, but nevertheless still represents a substantial increase. The total return is 27.5%, up from 8.40% in 2013, and the annual increase in the lease rate is 6%.

The Barcelona market is rebounding after the crisis of 2008. JLL reports a 21.6% increase in city office prices, while the total return is 27.1%. Madrid is ranked two places below, with a total return of 24.5%.

Office prices saw double-digit growth in some other cities, such as New York, Tokyo, Paris, Munich, London, Washington and Beijing, where total returns were over 10%.

The total return in London was 14%, compared to over 21% in 2013. Despite the fact that the market is gradually slowing, office space in the UK capital is still considered the most expensive in the world. Knight Frank reports that the cost per square metre averaged EUR38.6 thousand in Q3 2014. According to CBRE, the rental price in the West End is 1,445 euros/sq. m per annum – only downtown Hong Kong is more expensive (around 2,000 euros/sq. m per annum).

Hong Kong appears towards the bottom of the rankings, held back by low rental yields (2.9%) and an almost zero change in capital value (0.3%). However, high demand and low risks mean that commercial property is a reliable investment in the city.

Office prices fell in Zurich, Prague and Moscow, resulting in zero or negative total returns. Zurich-based foreign companies leasing offices in Switzerland were put off by the growing Swiss franc, which made Zurich property riskier. Offices in the city became 3% cheaper over the year. JLL reports that prices for Moscow office space fell by 29.8%, whereas rental yields in the Russian capital were high (8.5%), overtaking all other cities in the country, and thus indicating greater potential risks for investors. Knight Frank reports that leases in Moscow became cheaper by 4.3%, while JLL predicts a further 5-10% decrease in rental rates by 2019.

Housing: Istanbul, Berlin and San Francisco lead the way

Out of all the cities ranked, the largest increases were seen in apartment prices in three cities: Istanbul (by over 21%), and Berlin and San Francisco (both over 12%). Total returns amounted to 27%, 16% and 15%, respectively.

The total return in Berlin went up from 14.06% in 2013 to 16.02% in 2014, while in San Francisco an opposite trend was seen: returns fell from 16.39% to 15.36%.

According to Reidin, in November 2014 prices for apartments in Istanbul rose 21.58% year-on-year. The city is currently witnessing a real estate boom and embarking on a construction spree, amid unparalleled demand from buyers and investors. A further lure is the relatively low level of prices per square metre: USD1 million can buy 97.1 sq. m of housing in Istanbul, which would equate to only 25.2 sq. m in London and 40.2 sq. m in New York, reports Knight Frank.

Apartments yields in 2014

Rank City Rental
yields, %
Change
in capital
value, %
Total
return, %
01 Istanbul 5.83 21.58 27.41
02 Berlin 4.02 12.00 16.02
03 San Francisco 3.16 12.20 15.36
04 Tokyo 5.02 8.10 13.12
05 Los Angeles 5.04 7.80 12.84
06 Toronto 4.70 7.00 11.70
07 Washington 4.50 5.90 10.40
08 Barcelona 4.12 3.50 7.62
09 Munich 3.19 4.30 7.49
10 Moscow 3.39 3.70 7.09
11 New York 3.62 2.90 6.52
12 Dubai 5.82 0.30 6.12
13 London 3.21 2.60 5.81
14 Rome 3.86 1.50 5.36
15 Prague 4.18 1.00 5.18
16 Hong Kong 2.82 1.10 3.92
17 Shanghai 2.92 0.00 2.92
18 Beijing 2.22 −0.50 1.72
19 Paris 2.89 −1.20 1.69
20 Vienna 3.54 −3.00 0.54
21 Madrid 4.32 −7.30 −2.98
22 Zurich 3.43 −8.00 −4.57

Figures reported by the Canadian Real Estate Association, CBRE, Global Property Guide, Idealista, Knight Frank, Laforêt, Realty Track, Reidin, Savills, WohnungsBoerse.Net, Zillow

2014 total returns also exceeded 10% in Tokyo, Los Angeles, Toronto and Washington.

Over the past year, apartments in some cities, such as Beijing, Paris, Vienna, Madrid and Zurich, have become cheaper. Prices in Zurich depreciated by 8%, and the total return in all the above cities was zero or negative.

The lowest rental yields are to be found in Chinese cities (Beijing, Shanghai, Hong Kong), where total returns are less than 3% due to the high population density, high demand for housing, low vacancy rates and, consequently, low risks for investors. Housing prices in these cities are stagnating, as steps are taken to cool the real estate market and avert property bubbles.

George Kachmazov, CEO at Tranio.com, comments, “My recommendation to all who are interested in buying high-yielding property is to base your decision not on yields but on a low level of risk. Buy the best designed properties in the best neighbourhoods in the areas where you want to live. It is crucial that housing should be new or recently refurbished. Invest in the most transparent, mature and best-regulated markets – such a strategy is bound to be successful.”

Yulia Kozhevnikova, Tranio.com

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