Research article

Period of adjustment

Prime rental growth has on average performed worse than price growth, hindered by travel restrictions and lower demand in urban centres

Just 31% of cities saw positive rental growth in the second half of 2020. An increase, however, from the 19% that saw rent rises in the first half.

Reduced travel impacts some European cities

Reduced mobility has dampened prime rental values in cities around the world, including many in Europe. Amsterdam and Berlin, however, proved resilient with prime rents increasing over the past year. Both cities have limited supply. Berlin’s rental regulation has also further reduced the supply of rental properties as landlords increasingly move rental apartments onto the sales market. This has left availability on the rental market at record lows.

Tourism is an important driver for many European city markets, an industry which has been hard hit by the pandemic. Some European markets have felt the impact of rising rental supply levels as properties previously let on the short-term market have added to supply. This led to rent declines in Paris, Madrid and Barcelona over the past year.

An increase in supply, from both short-lets and completing new build stock, also impacted prime rents in London. The UK capital saw the largest rent declines of the European cities in the index through 2020.

Rental falls in Asia Pacific, but Seoul bucks the trend

Hong Kong saw the largest prime rent declines of the Asia Pacific cities in the index in 2020, followed by Sydney. Prime rents in both cities have been badly impacted by lower international and corporate demand as a result of travel restrictions. Both cities, however, saw a larger fall in rents in the first half of the year following the initial impact of the pandemic.

Economic activity in China largely returned to normal in the second half of the year. Travel restrictions remain in place, which has greatly reduced international arrivals and stifled demand in the rental market. Prime rental growth has, therefore, remained below price growth.

Seoul remains an exception, with the strongest prime rental growth of the cities in the index in 2020. Historically low interest rates combined with South Korea’s unique Jeonse system, where tenants pay the landlord a refundable deposit equivalent of 70–80% of the property value, make the rental market more attractive for tenants. Jeonse listings are now becoming harder to find as landlords wish to move to regular rental contracts due to the low interest rates.

Desire for space drives US city rental growth

As seen in many Western markets, the desire for space was seen to have an impact on the rental market in the US. As many people opted to move away from densely populated areas over the past year, the cities in the index where space is on offer have performed better.

Los Angeles and Miami both maintained positive rental growth as a result of this search for more space. The more densely populated San Francisco, meanwhile, experienced small rent falls. New York experienced the largest decline, as an apartment-orientated market with higher levels of supply.

Supply and demand dynamics take a toll

Cape Town experienced the largest fall in prime rental values out of the cities in the index over the past year. As a fall in tourism has led to a rise in supply of properties previously let on the short-let market.

In Dubai, existing oversupply continued to have an impact on prime rental values. Rent declines, however, slowed in the second half of the year as economic activity picked up.

Read the articles within Savills Prime Index: World Cities below.

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