LUXURY RESIDENTIAL RENTS RISE FASTEST IN TORONTO Key luxury rental markets saw prime rents fall 0.4% in 2016 with supply proving the key determinant of rental market performance

RESIDENTIAL RESEARCH

PRIME GLOBAL RENTAL INDEX

TAIMUR KHAN Senior Research Analyst

“ Ten cities recorded rental growth over the course of 2016, up from seven in 2015.”

Follow Taimur at @TaimurKF

For the latest news, views and analysis on the world of prime property, visit our blog or follow @KFIntelligence

Prime rents across the 17 key cities tracked in Knight Frank’s Prime Global Rental Index fell marginally by 0.4% in 2016. This compares to 2.5% growth reported by the index two years ago.

While the general trend was for rental declines in 2016, there were areas of positive performance. Ten cities recorded rental growth over the course of 2016 up from seven in 2015. At the same time the difference between the strongest and weakest-performing markets increased to 14%, up from 12.5% in 2015.

Toronto leads our ranking with prime rents growing by 8% year-on-year. This rise comes despite a fall in the volume of tenancies agreed over the course of the year caused by a lack of supply in the condominium rental market. With luxury house prices in Toronto rising by 15.1% in 2016, buyers who may have been considering single-family homes are now turning their attention to the less-expensive condominium market which exacerbated the lack of supply further.

Nairobi remained the weakest-performing market for the fourth consecutive quarter with rental values falling by 6% in 2016. However, in the last quarter of 2016, prime rents were unchanged, suggesting declines may have started to bottom out. This trend is further supported by a steady increase in oil prices over the past few months.

Despite rental value declines in prime central London in 2016, latest activity data is pointing to an uptick in demand, which is beginning to counter-balance the effect of growing supply. The number of tenancies agreed in prime central London was 20% higher in the final quarter of 2016 compared to 2015. Meanwhile, there was a 12% year-on-year rise in new rental properties coming onto the market in the final quarter of 2016, a figure that was lower than the increase of 30% recorded over the first nine months of the year. We expect more positive rental performance in 2017.

North America continued to be the strongest performing world region for the fifth consecutive quarter with average annual prime rental growth of 5.2%. Europe displaced Africa as the weakest-performing region with prime rents falling 2.1% in 2016.

With increasingly active fiscal and monetary policies in the US, such as President Trump’s proposed US$1trillion infrastructure plan and tax cuts as well as the decision by the Federal Reserve to raise interest rates, we may see other central banks and governments follow suit to either support currency or to deal with any spill-over of inflation. Higher interest rates would negatively impact on market affordability, a process which could lead to an increase in the demand for rental accommodation, as prospective buyers opted to rent for a period.

Results for Q4 2016Average prime global rents fell marginally by 0.4% in 2016

North America saw prime rents increase by 5.2% on average

Europe displaced Africa as the weakest-performing region with prime rents falling 2.1% in 2016

Toronto leads the rankings with prime rents increasing by 8% on an annual basis

Nairobi occupies the bottom ranking with rents falling by 6% year-on-year

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FIGURE 1

PRIME GLOBAL RENTAL INDEX Q4 2016

Source: Knight Frank Research, Miller Samuel/Douglas Elliman, Ken Corporation

FIGURE 3

Proportion of cities by annual change in prime rents 12-month % change (Q4 2013-Q4 2016)

Source: Knight Frank Research, Miller Samuel/Douglas Elliman, Ken Corporation

FIGURE 4

Prime rents by world region Average annual % change to Q4 2016

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Prime CentralLondon

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Source: Knight Frank Research, Miller Samuel/Douglas Elliman, Ken Corporation

FIGURE 2

Prime Global Rental Index, Q4 2016 Annual % change

Tracking prime residential rents across 17 cities

Luxury prices across the 39 cities tracked by our index increased by 4% in 2016, however, it was a year of two halves. The first half of 2016 saw values jump 2.8% on average, the second half recorded only a 1.2% increase.

China’s main cities dominate the top tier of rankings. Shanghai, Beijing and Guangzhou all saw luxury prices accelerate by more than 26% in 2016. However, this is not a country-wide phenomenon. Smaller cities and rural areas are not seeing the same level of growth. Rising household wealth and a lack of supply is fuelling price growth but cooling measures introduced in the last quarter of 2016 are starting to have some effect.

The ranking side-by-side of Toronto (15%), Vancouver (15%), Sydney (9%) and Melbourne (9%) confirms both countries are witnessing similar market supports and constraints. Historically low interest rates, strong overseas interest and robust GDP growth are boosting values (in both countries) but steps taken in 2016 to cool price inflation on a state and city basis in both countries are reducing the rate of growth.

The world’s top financial hubs – London, New York and Hong Kong – are not seeing the capital appreciation they were five ago (figure 3).

London (-6%) is adjusting to a new tax burden following a 3% rise in stamp duty for additional properties. However, activity rose steadily in the second half of 2016, Knight Frank sales were higher in November 2016 than in the same month in 2014 and 2015.

Hong Kong, which recorded negative growth in 2015, drifted upwards in 2016, recording annual growth of 2.1%. The increase would be higher were it not for the increase in the double stamp duty rate to a standardised 15% in early November.

New York’s luxury sector faced notable headwinds in 2016. The strong US dollar negated some overseas interest and the delivery of a large number of luxury new projects helped inflate supply. But while volumes slowed, prices proved resilient. With President Trump expected to embark on a programme of fiscal stimulus, reduced regulation and infrastructure investment, there is potential for stronger growth in 2017.

Moscow (-11%) and Tokyo (-9%) occupy the index’s lowest rankings in 2016. Low oil prices and the rouble’s weakness account for Moscow’s decline, whilst the pace of growth in Tokyo has slowed considerably and inventory levels are on the rise.

Results for Q4 2016Shanghai, Beijing and Guangzhou occupy the top three rankings, each recording annual price growth in excess of 26% in 2016

The index increased by 4% in 2016, down from 4.9% in 2015

The world’s major financial hubs (London, New York and Hong Kong) are not seeing the rates of capital growth they were five years ago

Analysis by world region shows Australasia and North America are the key engines of luxury price growth globally

Moscow (-11%) and Tokyo (-9%) occupy the index’s lowest rankings in 2016

KATE EVERETT-ALLEN International Residential Research

“ 2016 was a year of two halves. The first half saw luxury prices jump 2.8% on average, the second half recorded only a 1.2% increase.”

Follow Kate at @keverettkf

For the latest news, views and analysis on the world of prime property, visit Global Briefing or @kfglobalbrief

SHANGHAI LEADS LUXURY RESIDENTIAL PRICE INDEXThe world’s luxury homes are recording a slower rate of growth but Chinese cities along with those in Australia and Canada continue to buck the trend.

RESIDENTIAL RESEARCH

PRIME GLOBAL CITIES INDEX

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Prime Global Cities Index Q4 2016 Annual performance over the last five years 12-month % change

Source: Knight Frank Research

Prime Global Cities Index - Q4 2016

RESIDENTIAL RESEARCH

Key Facts Chinese developers and investors purchased a total $2.4 billion worth of Australian residential development sites in 2016; 38% of total sales.

Residential development sites purchased by Chinese developers and investors, had an average area of 21,045 sq m in 2016; increasing more than 18 times from 2012.

In 2016, Australian development sites purchased by Chinese developers and investors averaged a potential 502 dwellings per development site.

MICHELLE CIESIELSKI Knight Frank Residential Research Follow Michelle at @MCiesielski_AU

Almost one-sixth of the world will observe the Chinese New Year starting 28 January 2017; the most important time in the Chinese calendar. As Chinese communities head into the Year of the Rooster, we reflect on the rise of Chinese residential developers in Australia. Gong Xi Fa Cai!

Chinese developers and investors purchased $2.4 billion worth of Australian residential development sites in 2016. This was 9.4% stronger than recorded in the prior year. This trend has been emerging over the past five years while the Australian residential market collectively strengthened throughout 2012 and in 2013, growth in sales turnover encouraged prices to rise for local developers and investors alike. At this time, the Australian dollar became very favourable against other currencies for investment into Australia. The Chinese renminbi was no exception. Opportunistic developers, many for the first time, considered Australia to build their next development after becoming a household name in homeland China. It was considered, and still is to some extent, worth the risk to build a first-time signature development (even if profitability resulted to be just break-even) to be accepted as a reputable developer, by the local Australian market. Despite overall total sales falling during

2016, and sales to Chinese developers and investors are still 11.2% lower than the market peak recorded in 2014, their influence has grown. In the past three years, Chinese developers and investors accounted for over 25% of disclosed total sales each year with 2016 recording a share of sales as high as 38%.

Source: Knight Frank Research

FIGURE 1

Australian Residential Development Sites Purchased by Chinese Developers and Investors % portion of disclosed total sales, by value

THE RISE OF CHINESE THE RISE OF CHINESE THE RISE OF CHINESE DEVELOPERS IN DEVELOPERS IN DEVELOPERS IN AUSTRALIAAUSTRALIAAUSTRALIA MARKET INSIGHT MARKET INSIGHT MARKET INSIGHT JANUARY 2017JANUARY 2017JANUARY 2017

Residential development site sales suitable for low, medium and high density; threshold of $2M+ for all states, with the exception of NSW & Victoria being $5M+.

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The Rise of Chinese Developers in Australia - January 2017

DATA DIGEST

RECENT MARKET-LEADING RESEARCH PUBLICATIONS

Knight Frank Research Reports are available at KnightFrank.com/Research

RESIDENTIAL RESEARCH

Liam BaileyGlobal Head of Research +44 20 7861 5133liam.bailey@knightfrank.com

Taimur KhanSenior Research Analyst+44 20 7861 1436taimur.khan@knightfrank.com

PRESS OFFICE

Astrid Etchells+44 20 7861 1182astrid.etchells@knightfrank.com

The Knight Frank Prime Global Rental Index is an important resource for investors and developers looking to monitor and compare the performance of prime residential rents across key global cities. Prime property corresponds to the top 5% of the housing market in each city. The change in prime residential rents is measured in local currency. The index is compiled on a quarterly basis using data from Knight Frank’s network of global offices and research teams.

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Knight Frank Prime Global Rental Index, Q4 2016 Ranked by annual % change

Rank Country 12-month % change

(Q4 2015-Q4 2016)

6-month % change

(Q2 2016-Q4 2016)

3-month % change

(Q3 2016-Q4 2016)

Market direction*

1 Toronto 8.0% 3.6% -0.2%

2 Cape Town 6.3% 4.8% 2.9%

3 Guangzhou 3.9% 2.8% 2.0%

4 Zurich 3.3% 3.3% 0.0%

5 Tel Aviv 2.4% 2.0% 0.9%

6 New York* 2.4% 0.3% -3.0%

7 Beijing 1.4% 1.0% -0.1%

8 Tokyo² 1.4% -2.0% -0.4%

9 Shanghai 1.0% 0.8% -0.3%

10 Taipei 0.0% 0.0% 0.0%

11 Vienna -0.1% -0.6% 1.6%

12 Singapore -3.3% -1.8% -0.4%

13 Moscow -4.2% -0.8% 0.2%

14 Geneva -4.6% -7.5% -3.1%

15 Hong Kong -5.1% -0.2% -0.2%

16 London¹ -5.1% -3.1% -1.6%

17 Nairobi -6.0% -1.7% 0.0%

Source: Knight Frank Research, Miller Samuel/Douglas Elliman, Ken Corporation 1 London: new data is available for prime central London here ² Data is based on all rental contracts agreed above ¥ 300,000 or where the internal area is 30 tsubo+ * New York data is to Q3 2016