High-net-worth individuals who want to buy a new piece of luxury real estate this year have several good options when considering places with expected price growth, strong rental yields and compelling lifestyle benefits, such as educational opportunities, proximity to transit hubs and residency perks.
The European cities of Dublin, Paris, Berlin and Lisbon were repeatedly listed as places with strong market fundamentals and a low-risk environment, making them good bets for both investors and second-home owner-occupiers, according to a handful of experts and new research reports.
"So many cities around the world have seen a lot of asset price inflation in recent years," said Yolande Barnes, the director of world research at Savills. "The name of the game today is finding the places that have good fundamentals in terms of supply and demand that haven’t seen their full growth."
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Michael Valdes, the New York-based global vice president of international servicing at Sotheby's International Realty Affiliates LLC, added that it’s also important to consider the motivation for foreign buyers to invest. For instance, even though it’s already shown what some might consider "full growth," Chinese buyers will still look to invest in the Australian cities of Sydney and Melbourne, while Middle Eastern and Russian buyers will look to London, "a very secure market" where "the economic situation will fix itself," Mr. Valdes said.
On the other hand, properties outside of prime central London, most Chinese cities, including Shanghai, Beijing and Hong Kong, and Middle Eastern cities other than Dubai ended up on experts’ "wait and see" list, because they’re currently too risky and expected to have little to no price growth in the coming year.
The best bets for 2018
When looking for cities that haven’t yet performed to their full potential, Ms. Barnes noted that a few of them are in Europe, where for various reasons, international buying hasn’t been as strong as it’s been in other parts of the world. Dublin tops her list as a city worth considering in 2018 for a few reasons, she said.
"Dublin is a small market where there are a lot of nice fundamentals, such as economic growth and population growth," Ms. Barnes said, adding that population growth, specifically, is important because it’s tied to capital growth and demand, and something many European cities lack.
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Rental yields in Dublin, meaning the annual rental income over a property’s total value, are also high, at 5% to 6% in the luxury sector, which indicates that there’s room for capital growth.
Simon Barry, head of new development at Harrods Estates in London, agreed with Ms. Barnes, and included Dublin at the top of his list of places luxury buyers should look into in 2018.
"More than anywhere else in the E.U., Dublin has sorted itself out since the credit crunch," Mr. Barry said, "but it still has a long way to go to reach its 2008 peak," meaning that prices are likely to keep increasing.
A second city that was repeatedly mentioned is Berlin, which topped the Urban Land Institute and PricewaterhouseCoopers’s 2018 "Emerging Trends in Real Estate: Europe" report for the fourth year in a row, with an expected 4% increase in rents and capital value expected this year. (Dublin is listed as 7th on that list.)
Knight Frank also listed Berlin as a city to watch, ranking it second on its global prime residential forecast, with an expected 7% growth for luxury home prices this year. In the
"who’s buying where" section of its 2018 outlook, Berlin is noted as a place "high on most global buyer wish lists" due to its young demographic, strong economy and growing rental demand.
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Anita Gärtner, managing partner at Berlin Sotheby's International Realty wrote in an email that the Berlin of today, with new developments rapidly being raised, exponential population growth and a booming economy, driven by the city’s tech industry, reminds her of London in the early 2000s or the San Francisco Bay Area more recently.
Even though property prices have doubled in the last 10 years, she continued, Berlin is still reasonably priced compared to any other global city in the world, with prices that are expected to continue rising.
A third city mentioned repeatedly along with its surrounding region is Portugal’s capital city, Lisbon, and nearby markets, including a western suburb called Cascais and a southern resort area favored by the Brits called Algarve.
"Lisbon has a strong market with great luxury properties and tax incentives for professionals and retirees," said Gary Hersham, principal at London-based Beauchamp Estates, noting that the country has some cachet that used to belong to Spain. Plus, there’s the Golden Visa program, which offers investors who purchase a property for more than €500,000 (US$601,395) the opportunity to apply for citizenship after six years.
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A final city mentioned by several experts as a top pick for 2018 property investment isParis, which topped Knight Frank’s annual global prime residential forecast, which noted luxury home prices are expected to grow there by 9% this year.
According to Knight Frank’s head of international residential research, Kate Everett-Allen, Paris is still relatively reasonable when compared to other top-tier cities in the world, with prices at the prime end of the market coming in at about €18,000 per square meter (US$1,998 per square foot).
While the Knight Frank report favored the "super-chic" 6th and 7th arrondissements as areas to consider investing, Raphael Sonigo, director of the Paris Ouest Sotheby’s International Realty office, noted that the ideal investment should be made in the "Triangle d’Or" area— "especially in the 16th district, around the Trocadero, near the Eiffel Tower"—where buyers can pick up an apartment with a view that will be valued by French and foreign buyers alike and will be easy to resell down the road.
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Other places to consider
Ms. Barnes said when looking for cities with growth potential, she’s increasingly relying on high rental yields to indicate when there’s the potential for capital growth. "Yields are also a good way of comparing cities around the world with different currencies and price points," she said.
With this in mind, a few additional markets made her list, including Dubai, Amsterdam, Austin, Texas, and Cape Town, South Africa, where buyers who wants to get a bit more adventurous can chase 8% to 11% yields in a higher risk environment, Ms. Barnes said.
Other than yields, many experts also considered lifestyle factors that drive investor purchase decisions. Switzerland is a favorite because of its "ultimate safe haven" status, Mr. Barry said, although it can be a difficult place for non-Swiss residents to make a property purchase.
Sydney is another "safe haven" with continued growth in the prime central business district, buffeted by mainland Chinese buyers. Knight Frank expects luxury prices to rise by 7% in 2018, and the city topped the new "Emerging Markets Asia Pacific" report, which estimates the rental growth uptick in 2018 will be 6.6%.
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And the prime central London neighborhoods of Kensington, Knightsbridge, Mayfair and Belgravia, where bottomed out prices have led to some serious deals, is another place worth considering, especially if you’re an overseas investor who can take advantage of weak sterling, Mr. Hersham said.
Once Brexit has sorted itself out and some certainty returns, "there will definitely be a bounce back from the current position," Mr. Barry added.
Cities to avoid, or take a "wait and see" approach
While the list of where to buy is long, the list of cities to avoid, or take a wait-and-see approach—at least in the short term—is geared toward avoiding risk.
"While we’re 10 years out from the global financial crisis, a lot of the places we might have thought would be good by now, such as South Africa, Istanbul, Malaysia and Spain, suddenly have a lot of political risk," Mr. Barry said.
Added Ms. Everett-Allen: "The narrative of capital flight to safe havens that started after the global financial crisis is still continuing."
As a result, Middle Eastern locales such as Doha, Qatar, Abu Dhabi and cities in Saudi Arabia are also currently deemed too risky by many.
For a separate reason, many experts note that it’s best to avoid major Chinese cities, including Shanghai, Beijing and Hong Kong for the time being.
"They’ve all seen big growth, and the yields are now low," Ms. Barnes said, noting that Hong Kong’s yield is hovering around 1.5% in the prime sector. "This means that there’s very little scope for further capital growth without rental growth first," she said. Plus, it’s difficult for non-Chinese buyers to purchase property in these cities.
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While a few people noted that London and New York are solid places to buy because of continuous demand from high-net-worth individuals around the world, Ms. Barnes cautioned that buyers may not see the rental growth or capital growth they desire, because they’re already on a "high plateau in terms of capital values."
However, even in a market that’s broadly static or slightly falling, she said that there are neighborhoods or pockets that outperform the larger city, where buyers can find wealth creation and drivers of growth. Buyers just need to hone in on that "demand story," she said, and hold off on making purchases elsewhere in these cities… at least for now.