Value For Money: Mumbai Worst, Singapore Best

In its latest World Cities Review, Savills ranks New York the second most expensive place to rent business and residential space for employees, replacing London, and behind Hong Kong.
Savills measured the total annual rent and occupation costs (including local taxes and service charges) for both residential and offices for 14 employees plus households. In its math, seven are employed in financial services and seven in a creative industry like a tech start-up. Taking that a step further, it related those costs to the average annual gross domestic product per capita of each city to see how sustainable those costs might be.
By that measure, Singapore, which ranks sixth based on expenses, is the cheapest city in relation to its GDP per head. It’s less than half the cost of Hong Kong and nearly five times cheaper than Mumbai.
“Headline per square foot office rents are a misleading indication of the total real estate costs faced by relocating companies,” says Yolande Barnes, director of Savills world research. “The value of real estate is higher where more corporate revenue can be generated.” In other words, “it is worth paying more to accommodate an executive team in Singapore with its high GDP than in the low GDP Mumbai,” says Barnes.
And with an economic slowdown in India, and other new world cities on Savills’ list, those returns are likely to be further depressed. The slowdown also is leading to a re-balancing in the performance of real estate in the old world with the new world as these changes occur, says Savills.
For instance, while the more established ‘old world’ prime office rents are now up 3% over their peak in 2008, ‘new world’ rents remain down 25%, raising questions over the fundamentals of demand and supply in locations such as Singapore, Mumbai and Moscow.
Residential rental growth in the world’s leading cities, on the other hand, outperformed office rents in the first half of 2013, making residential real estate look a viable investment asset class, says Savills.
To understand the true appeal of residential as an asset class in each city, Savills 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.
By that math, some world cities, particularly in the ‘new world’, and most notably Moscow and Mumbai, look overvalued, says Savills. By the same measure some ‘old world’ cities look good value.
New York now offers the strongest gross residential yields, at 6.2%, against U.S. government bonds at 3.4%. Mumbai, on the other hand, offers a residential yield (Gross) net of 10-year government bond yield of -4.2%, the worst in the 10 city survey.