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Factors affecting rental accommodation costs

Employment rates, political turmoil, growing tourism, the setting up or winding down of new projects – ECA's Georgia Wilson explains how these factors and more influence rental property price trends around the world.

The Americas – improved employment figures led to rental price rises across the US, while some Latin American cities also saw significant increases.

As the jobless rate in the US returned to pre-crisis levels, rental prices there rose 9% on average. Some of the largest rental increases in North America between our 2013 and 2014 surveys occurred in Minneapolis, Denver, Detroit and San Francisco – cities which have all seen extensive job growth.

A theme common to cities worldwide, but well-illustrated by the situation in Detroit in recent years, is that of high renter demand stemming from would-be home-owners who, faced with borrowing restrictions and high sales prices, are forced to rent. In Minneapolis and Denver this was further exacerbated by recovering property sale prices: owners forced to rent out their property by the poor economic climate are now selling these properties, removing rental stock from the market. In contrast, Washington and Philadelphia saw an oversupply of new developments, causing rents to stagnate.
In Brazil, urban redevelopment and high-end property development continue to lead to the gentrification of many parts of RiodeJaneiro as the 2016 Olympic Games draw nearer. Demand for new high-end developments commanding higher rental prices continued to increase and the city saw the biggest rental price increases in Latin America in 2014.
The growing technological and service industry in MexicoCity has driven demand for rental accommodation pushing rents there up significantly. Properties in the upmarket area of Polanco are particularly sought after.

Africa – a mixed bag with the biggest increases observed in South African cities.

Renewable energy projects have drawn expatriates to CapeTown which, along with Pretoria, experienced the highest rental rises of the locations surveyed in the region last year.
A strong economy and the growing presence of multinationals in Mozambique attracted by the discovery of natural resources has meant that demand for rental accommodation in Maputo has been high. While new supply entering a market to meet demand will lead to expectations of price drops, if these new developments are high-standard, as has been the case of Maputo, they will command higher rents and in fact drive up rental prices.
In Lagos, the residential market, having come under strain in recent years, now finds itself oversupplied with good quality accommodation as numerous building projects have come to fruition. As a result rental prices there declined last year. Fragile economic conditions in Zimbabwe saw prices fall, too, in Harare, a new addition to our coverage, as landlords dropped rents to attract tenants.
Following three years of political turmoil, rental prices fell in Cairo. However, as the political climate settles, economic confidence is returning and rents are expected to stabilise in 2015.

Asia – rental prices have fallen in a number of locations. However, Myanmar’s Yangon, newly included in our coverage has seen huge increases.

Political reform and the easing of international sanctionsin Yangon have generated a surge in multinational operations and a boom in demand for rental accommodation. Meanwhile, the supply of properties meeting even minimum quality standards for corporates is exceptionally limited. Tight supply has been further aggravated as residential properties are used, instead, for office space by the increasing numbers of multinationals present in the city. Price increases have been steepest (upwards of 40%) in Bahan Township, close to the city centre and home to the highly desirable Golden Valley neighbourhood. Increasingly, expatriates are looking for property further from the city centre.
High levels of political and criminal violence in Karachi have increased demand for accommodation with robust security, pushing up rental prices sharply. Increases were most pronounced at the lower end of the market, as well as in the city’s largest compound, Defence Housing Authority where the newly completed Phase 8 development includes luxury, highly secure new properties which command relatively high rents.
A number of locations in the region have experienced declining prices. In HongKong, for example, GDP growth has been sluggish, with a contraction occurring in the second quarter. Falling investment and consumption has impaired employment prospects for expatriates in the city, and the high cost of living further discouraged relocation to Hong Kong. A result of this is that after being stagnant for a couple of years, rental prices fell in 2014. Significant rental price falls pose a number of challenges for HR. Not only will they have to look at negotiating decreases in rent, they will also have to deal with the issue of assignees at the same job level having different housing allowances due to the time of year they went on assignment.

Europe – a feeble economic climate across much of the region led to rental prices increasing at a slower rate on average in 2014.

However in Riga – a new addition to our coverage – rental increments far exceeded the regional trends. Latvia's integration into the Eurozone in January 2014 has led to economic growth and higher levels of foreign investment there. This, in turn, has stimulated expatriate demand for rentals in Riga. Both existing stock, which has been renovated and modernised to high standards, and new developments, have commanded higher prices, especially in the districts of Vecriga, Klusais Centrs and Jurmala. Supply has also been affected by growing tourism since many landlords have moved away from the long-term market towards short-term holiday renting. Those who have opted to remain in the long term market have done so in exchange for higher rents. However, going into 2015, stock has increased, bringing rent escalation to a halt.
Rental prices in Dublin have also bucked the regional trend. Ireland’s strong economic growth has attracted MNCs back to Dublin but the lacklustre rate of rental stock additions (developers and construction companies, unhappy with profit margins, have been hesitating to build until prices rise) is failing to meet the rising demand from expatriates and professionals. Consequently, rental prices there have now been pushed up.
It’s a different picture in Rome. With the economy there contracting in the first, second and third quarters of 2014, landlords were forced to negotiate on rents, resulting in some considerable price falls.

In Cyprus which has remained in recession since mid-2011, poor employment prospects have been worsened by a liquidity crunch, keeping demand low and causing rents to drop in both Nicosia and Limassol.

Middle East – rental prices increased steadily last year in most locations surveyed in the region.

However, Dubai’s successful bid to host the World Expo 2020 has seen international companies expand operations there, pushing up rents faster than the regional average – increases have not been as exorbitant as the rates witnessed there in 2013 thanks to the release of a number of new developments onto the market. Strong demand did also see rents in Kuwait City and Muscat rise faster than the regional average.

Oceania – most rental prices in the region remained static in 2014 due to widespread economic slowdown.

Nevertheless, rental prices in both Canberra and Perth fell following an influx of newly developed properties onto the market. In Perth this new supply of residential property arrived on the market just as the mining boom there slowed, dampening demand.
Conversely, very low vacancy rates in Melbourne and Sydney pushed prices in these cities up in 2014. High prices in the sales market in Auckland have fuelled demand for rental properties resulting in modest rental growth there.
The situation in Port Moresby, another new addition to our coverage, shows clearly the knock-on impact a one-off project can have. The city experienced the most severe drop in rental prices globally in 2014. The gas production and processing project, PNG LNG, launched in 2010 attracted a significant influx of expatriates and high-end rental property development, causing rents to soar dramatically up until 2013. When construction of the plant was completed in April 2014, the result was an exodus of expatriates and an over saturated rental market. Rental prices in Port Moresby plunged more than 30% on average, with the cost of the highest-end properties plummeting the most severely.

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