The global
overview – OECD wrecked by an overreaction
The economic disaster lockdowns rendered on especially the SME sector
has been well documented, and now we are about to enter another seasonal flu
season in the northern hemisphere, it is timely to look at how the global
dynamic is as of early September (note maps below represent spot comparison to
Feb 2020 levels, so not strictly seasonally adjusted. However, a general
picture is still useful for plotting investment moves ahead.
The level of domestic transport is a generic proxy so we will start with
this – what seems obvious is the strong growth in Africa (Figure 1), up
>20% generally and some >50% - whereas similar geographic regions of S
America (very much under the radar screen of media) and SE Asia (also keen
followers of Western policies) have fallen significantly by similar extents,
showing how policy orientation so dramatically affects local livelihood:
Figure 1:
Transport proxy – Africa booming, Five Eyes decimated, SEA collapsed, Greece
up
Looking by sector, retail and F&B saw strong rises in Africa and The Middle East, but SEA and Oceania are completely wiped out (Figure 2),
and on the more wide economic indicator of workplace visitation levels (Figure
3), S America is up (seasonality?) and Africa is also up, while most of the
rest of the world is suffering – again most in the 5-Eyes nations and SE
Asia(!):
Figure 2:
F&B and retail – Africa up, 5-eyes down – SEA bad
It
is common knowledge that the bigger the house the higher the price,
even though unit prices may actually work in reverse, ie. the smaller
the house the higher the per-square-foot price. The phenomenon of higher
unit prices for smaller units is likely even more pronounced in densely
populated, liquid, and highly commoditised markets like Hong Kong.
In this article, we look at the phenomenon through the eyes of the
London housing market. But here, the picture may be more obscured due to
a less commoditised (or uniform) housing stock – such as wider variety
of land sizes, garden finishes, sun orientations, all factors which
could make our size-vs-unit price comparison more difficult.
Landlords can optimise rental income by size bands
We have gathered the asking rent of apartments in a well defined Zone
4 area in London over the past 4-5 years, and the resulting plot shows a
very clear relationship between the per square foot (psf) rent and the
size of the properties (Chart 1):
(Left)
Chart 1: Rent vs flat size: inverse relationship; (Right) Chart 2:
Detrended rents to better find correlation between rent and size
This is just the first step in establishing the relationship between
our two variables; in order to eliminate the inflationary effect of
rental increases over time, we have applied a discount factor derived
from average rents over the same period, and by adjusting older data
points by this factor, we can establish a ‘detrended rental series’
which more closely reflects the pure size-vs-rent correlation. The
result is illustrated in Chart 2 above, where the detrended (or real) rent are plotted in red while the original unadjusted (or nominal) rents remain in blue.
One obvious observation of the red datapoints is that they are more
tightly packed vertically, and therefore reflect a more authentic
underlying relationship with sizes of the properties. Other interesting
points to note include:
the biggest unit rent premium is achieved in the 500-600sf region, dropping from £2.8psf to £2.4psf – a whopping 14% drop (red highlight, Chart 2);
rents then stayed almost flat until just over 950sf when the drop
reaccelerates from £2.25psf to £1.6psf around the 1,400sf mark – another
29% drop;
These are very good intelligence/insight for any investors who want to maximise their rental return on investment.
Houses – lower liquidity/transparency than flats
Looking at a nearby neighbourhood where the housing stock is
predominantly terrace houses rather than renovated flats, the same rent
vs size pattern is also apparent.
However, due to much less emphasis being placed – in the house sector
compared to flats sector – on square footage of the premises, there are
much fewer listings giving size data for house letting adverts. This
may be due to houses tending to offer gardens and other aspects which
outweigh purely size considerations for potential tenants. The resulting
charted patterns are therefore less representative of the whole
sub-sector (hence Charts 3 & 4 showing less dense number of dots).
Interesting observations can nevertheless be made in the house sector – where subdivided lettings (ie <500sf listings – see red highlight, Chart 4) are probably more prevalent, while such segmentation is almost unseen in the flat sector:
(Left) Chart 3: house rent vs size; (Right) Chart 4: Detrended house rent vs size
Whether it be enterprising house owners subdividing or friends
sharing bedrooms in one property, the economics are even better for the
landlord, as the unit rent for a 300sf offering could go as high as
£3.4psf, and this is for a neighbourhood slightly down market from the
apartment district we sampled at the start of this article.
In the overall scheme of things, macro political-economic trends,
infrastructure build out, and other local micro factors would of course
play bigger roles in affecting how much rent can be earned on any
property, and that is where much more work has to be done in advance
when investing.
Simple rules as applies to property size
There may be other factors that lend to premiums/discounts on
properties (eg each 5 mins walk from subway station reduces rent by say
3%), but in our study here, two linear ratios may be derived for easy
consumption by landlords/tenants alike:
for the flat district, each 500sf flat may have a rent of £2.8psf,
with the unit rate dropping by £0.30psf every 200sf increase in size;
for house district covered above, each 500sf flat may have a rent
of £2.9psf with the unit rate dropping by £0.40psf every 200sf increase
in size.
In both cases, the non-linear nature of the size-rent relationship
makes it difficult for the average retail landlord to set optimal rents,
this is why diligence and research are the most useful tools in
ensuring the best returns in property – or in layman’s terms: know your
market well and stay focused on it.
Chart 5: rules of thumb for the lazy: £0.15 per 100sf for flat market, and £0.35 per 100sf for house market
The author would like to thank Samson Leung of Hong Kong Baptist
University for assisting in data collection, analysis, and drafting this
article.
