Zurich, London, Hong Kong, Geneva Ranked Top Global Rental Growth Cities

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Prime property rents grew at their fastest rate since Q2 2008

Based on Knight Frank's newly released Prime Global Rental Index Report, residential rents for prime property across key global cities rose by 1.7% in the second quarter of 2011 which represents the index's eighth consecutive quarterly rise.

In annual terms rents increased by nearly 9%, the index's strongest performance since Q2 2008 when rents rose by 14.7%. The recent growth represents a significant recovery, only two years ago prime rents were declining at an average rate of 17.2% per annum.

The rental markets' changing fortunes can largely be explained by the global economic climate, the changing nature of employment conditions and in particular the health of a city's financial service sector. It is no coincidence that the traditional financial centers of Zurich, London, Hong Kong and Geneva currently top the rankings for rental growth.

Given the close relationship observed between a city's financial markets and its prime rental sector the recent renewed concern over EU debt, stock market volatility and weakening consumer confidence raises the question have prime rents peaked?

At the moment it seems there is still some room for additional growth. In many of the main financial centers available stock levels are severely constrained. A number of western cities have low vacancy rates (Geneva's currently sits below 2%) here, demand will need to weaken significantly before rents come under real pressure.

Who rents prime property?

Most tenants are wealthy individuals who are owner-occupiers themselves, but their need to rent is usually borne out of a job relocation, changing family circumstances, the need to accommodate children who are studying or with the aim of getting to know an area before deciding to buy.

There are other tenants - more evident in boom sales periods - who rent when a competitive sales market means they need to act fast and be chain-free to secure the best property. These prime tenants have been most evident in parts of Asia Pacific in recent years where capital growth has exceeded rental growth, although the margin is starting to shrink as deflationary measures start to take effect.

In our view, rents particularly in the Asian cities have further to go, rental growth here has been outstripped by average earnings growth in recent years.

The risks in the western economies come in the form of worsening economic and financial news. Landlords and investors remain broadly confident with many now relying on investment yields as much, if not more than, capital value growth but their confidence will wane if employment markets weaken.

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