Tokyo Tabbed as Top Residential Investment Market

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Tokyo is the top world city for investors seeking "above-gilts income" from residential property, ahead of New York, according to a new study by Savills, the real estate consultancy.

"Rental yields in Tokyo look extremely attractive in relation to the extremely low returns available on government bonds in Japan," the firm reports. (Gilts refer to high-grade, low-risk government issued bonds.)

Tokyo ranked ahead of perennial favorite New York, followed by Paris, London and Singapore on Savills' charts. The firm listed Tokyo as the "surprise" of the research.

"Tokyo now looks a surprise but convincing 'buy' for investors, offering a gross yield at +3.9 percent over government bond rates," the report said.

Savills compared the gross rental income that investors receive in each city "net of gilts," providing 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.

Based on the results, Savills found "new world cities" such as Moscow and Mumbai appear over-valued, while old world cities appear to offer good value for investors.

"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," Savills said. But the firm cautioned that "low-yielding cities, where house prices are not underpinned by rental income, could be overvalued."

New York offers the "strongest gross residential yields," at 6.2 per cent, against U.S. government bonds at 3.4 percent, the firm reports. Also rents continue to rise in the city.

As a contrast, gross yields in Moscow are a high 5.8 percent, but low compared to the 7.4 percent available from government bonds, especially when the minimal prospects for rental growth are factored in.

Savills believes the "net of gilts" sheds light "not only on where income investors might put their money but also on how out of synch with underlying occupier demand a city's residential values might be."

"Some of the lowest-yielding cities have seen little or no rental growth while capital values have surged," says Yolande Barnes, director of Savills research. "If there is insignificant rental growth in future, these capital values may look overheated and this could trigger an adjustment.
 
"By the same token, if capital values have not moved as fast as rental values, this may indicate some room for capital value uplift. New York has the potential for over 60 per cent capital growth if average yields were to move in to the same extent as London yields have."

Savills believes Tokyo has potential for substantial capital value increases, but it is "unlikely to be realized because it is a more domestic and less internationally invested market than New York and London."

Nevertheless, the firm believes "substantial, double digit, growth is possible over the next three years in Tokyo."