A Guide to Understanding the Game of Property Appreciation vs. Rental Returns in 7 Cities in the World

Property buyers are always confronted with the classic and standard question: are you buying for rental return or for appreciation? How do you make the most out of your investment?

Jan 15, 2018 | By Palace

As an investor one is always confronted with the classic and standard question: are you buying for rental return or for appreciation? But of course, needless to say, we want it both ways. Eventually we consider each investment target and make the decision, which is balancing these two most important strategies of property and any other type of investing. From my experience working with wealthy investors around the world, including high-net-worth individuals (HNWI) and the Ultra HNWI, I learned that the expectations on returns are very much a geographical concept. It depends a lot on where the investors are from, and naturally where the investment is.

I was once advising a Russia-based UHNWI on investment and his holdings diversification into financial products and property in Singapore. His main business is in a chain of restaurants and F&B outlets in Russia among other businesses, which also included game technology. He owns a house in Phuket where his family sometimes stay at during the harsh Russian winters. I still recall his expression when I informed him of the expected rental returns on property in Singapore. He was certain I made a mistake and omitted a zero or two from the figure stated.

According to him, should the return on business be less than 100%, he would be thinking twice, and if it projects a less than less than a 50% annual return, he would not bother at all. But, and a very big “but”, he admitted that he never knew how long his business would run and how long it would survive till somebody bigger or stronger attempts to take it from him. He eventually followed my advice to park some of his assets in a safe place with slow but solid returns.

The difficult-to-summarise rental yields vs. appreciation dilemma


Let’s start with the beacon of property investors around the world: London.

The city is a good example of buying for appreciation rather than for rental yields. The super-rich will continue
to flock to London, despite the political and economic concerns around the UK’s intention to leave the European Union, according to a report published by Knight Frank LLP. The forthcoming Brexit process will not result in an outflow of wealthy individuals from the UK. Rather, it will mean that existing HNWI will be more likely to remain and to be joined by a growing list of new arrivals.

London nonetheless languished in 92nd place in Knight Frank’s ranking of luxury residential market performance included in the report. Prices slid by 6.3% in 2016, mainly due to tax changes, although sales volumes increased and sentiment improved at the end of 2016. Prime residential prices will remain unchanged in 2017, Knight Frank predicts. The number of UHNWI globally rose to more than 193,000 in 2016, assisted by stock-market gains. It will exceed 275,000 by 2026, advancing most swiftly in Vietnam, Sri Lanka, India and China. All these newly minted rich see the UK as the dominant centre for business and financial services in Europe, as well as being one of the major English-speaking economies in the world. Traditional links with the US, Canada, Australia and New Zealand will strengthen after Brexit.

Additionally, besides the UK, Ultra-wealthy migrants are expected to cluster around at least half a dozen “safe haven” jurisdictions such as Monaco, Israel, Canada and the United Arab Emirates, lured by fiscal and political stability and a better quality of life, according to the report. London has the attraction of being a base for their family and business operations and was a second or third home. For years, I analysed some of London’s new properties where the rental returns are not sufficient to cover the loan. Yet, they were all sold and resold and the process is still ongoing despite the negative returns, especially in the central parts of London (my focus is in prime areas and larger apartments).

Hence, we can see London as a case of buying for appreciation. I, in particular, do not believe in the axiom that the wealthy buy their property to have their own place to stay and that they don’t care for profit. I hear it many times from private bankers, investment advisers and property agents, but never from the wealthy investors themselves. Surely nobody buys property assuming that it will go down in value.

United States of America

Case in point, we can look at the US property market that was heavily over-invested for one reason: a hope for appreciation. It was a clear case of speculation that led to the market collapse in 2008, though in any given market with rapidly rising prices, there are sure to be those who will either cry wolf or warn of a bubble.

Let us look at the current situation of the US property market. US homeowners with mortgages, which count for about 63% of all U.S. homeowners, saw their equity increase by a total of USD 783 billion in 2016, an increase of 11.7%. Additionally, just over a million borrowers moved out of negative equity during 2016, increasing the percentage of homeowners with positive equity to 93.8% of all mortgaged properties, or approximately 48 million homes, according to CoreLogic. In the fourth quarter of 2016, the total number of mortgaged residential properties with negative equity stood at 3.17 million, or 6.2% of all homes with a mortgage. This is a decrease of 25% year-on-year from 4.23 million homes, or 8.4% of all mortgaged properties, compared with the fourth quarter of 2015.

Negative equity, often referred to as being “ underwater”, applies to borrowers who owe more on their mortgages than what their homes are worth. Negative equity usually occurs because of a decline in home value. Negative equity peaked at 26% of mortgaged residential properties in the fourth quarter of 2009, based on CoreLogic equity data analysis. We understand that if the value of the property depreciates in such a large scale, the repercussions can be horrific, such as a total market collapse. But this case doesn’t mean that buying for rental returns only is a safer way to look at investments.


Let us examine the other market that resembles the safe London: the regional (ex) darling of investors, Singapore, with its very low rental returns. In this small city-state, gross rental return (GRR) on bigger, luxury condos is currently around or less than 2%. For landed high-end property, it is even lower.

Naturally, as in the case of any market where financing can be obtained, the real return on investment or on your funds is much higher than the plain GRR calculation. But in Singapore now, it is more difficult to calculate the returns due to various stamp duties rates or taxes on buying and selling the property. For foreigners, it is 15% of additional stamp duty on the purchase of residential property, whereas a base 3% is applicable to all buyers. My conservative calculations show around 6% to 7% of rental return on equity or on your share of money, given 60% financing and given the case of foreigner buying at 15% stamp duty. Does it make any sense to buy a residential property when the GRR is so low and the purchasing is so costly?

For an outsider, it would look like a no brainer; no buy. Furthermore, one would expect such a seemingly unyielding property market to go down in price or to even collapse due to lack of returns. But the prices of Singapore property are holding. Why so? Let us look at some macros to understand the reasoning behind the investors who continue to hold to their property in the triple A rated Singapore economy. There are currently only 11 countries left rated AAA by Fitch, down from the 16 rated in 2009. As such, Singapore is an increasingly rare market, boasting a secure, strong economy and financial system.

The latest Euromoney Country Risk (ECR) survey, which for more than 20 years has ranked the world’s countries and states by investment risk, rated Singapore as the number 1 economy in the world in terms of sovereign risk. This is a major achievement and an extremely important rating in a current world beset by instability. Those who follow ECR know it is a very meticulously calculated and much appreciated award. It reflects a complex methodology combining the views of a community of economic and political experts across 15 categories of economic, structural and political risk; a further survey of debt syndicate managers; IMF data on debt indicators; and Moody’s and Fitch credit ratings.

ECR covers 186 countries, but the top spot rarely moves far. In 1993, Japan was the first top-ranked country. The US and Luxembourg have also held first place, but over the past decade either Switzerland or Norway have been in ascendancy. And now Singapore is tops. It is a major safe haven for investors and they are ready to tolerate very low rental returns because they don’t expect much of the downside and they do expect the upside in the values of their investment. Hence, with no inheritance and gain taxes, its still not a bad choice to park your money in the Merlion State.

Night view of Makati, the business district of Metro Manila, Philippines.

Lets look at some other investment targets:


Berlin was named the Top Market for Real Estate Investment and Development in 2017 for the second year in a row in a report carried out by Price Waterhouse Coopers (PWC) and the Urban Land Institute. Berlin scored high on investment and prospects for rental growth and prospects for capital growth. In 2016, the city’s performance was strong, with apartment prices rising by an average of 9.6%. In Germany, people tend to live in rental apartments rather than buy, so it sounds like a good place to look at for rental returns. A word of caution, some of my German investors warn of
pro-tenant laws. For example, when it comes to evictions, landlords cannot simply order you to get out of your quarters. Rather, they must comply with a number of procedural requirements under German law.

The landlord needs to keep security deposits in a separate account for the protection of the tenants if the landlord loses his assets in a bankruptcy action. Interest accrued on the security deposit must also be paid to the tenant when the tenant moves out.


A big (around 1,290 sq. ft.) Tokyo apartment’s rental return is stated at around 3.4% on the Property Global Guide. Given that one can obtain loans for the property relatively easily, the rental return on equity should be more than double of that. Japan is a fascinating country and having lived there for over a decade, I know the depth of this mesmerising culture.

I believe that tourism will grow tremendously and there will be more demand for short rentals, where the rental return will present itself in much higher levels, especially if you get someone reliable to run the service for you.
A word of caution: you might encounter some difficulties when selling the property and its better to take into account that possibility of property price depreciation. Hence, in Tokyo, the most important thing is to look at rental returns as I doubt there will be any appreciation due to demographics.

The Philippines

Rental yield of around 6% is stated in the Global Property Guide, which is a reasonable calculation, though from my own experience, the rental return is higher in the secondary cities. Also, the appreciation is higher than in the rather saturated central Manila. From my observations, condominium units grew in value at over 12% last year, the economy is booming and the population as well. Hence, in the Philippines, the case of combined rental return and appreciation are the game with very handsome returns on both sides, a compensation perhaps for a much higher political volatility as compared to Singapore.


The average gross rental yield has dipped to 3.2% for the year of 2016, down from 3.5% a year ago and 4.1% five years ago. Various estimates put property appreciation at around the same rates. But given numerous Mainland Chinese investors’ interest in property within the major Australian cities, it is clear that here the case of appreciation rather than rental returns is the game. According to Affluent Insights 2017, 56% of HNWIs in China are actively looking to invest in an overseas property in comparison with 18% of US HNWIs. In China, the real estate sector generated the biggest number of billionaires. Hence, Chinese investors are keen on property investing and it is well worth watching them.

If you read my articles, you’ll know where to put your money for property appreciation, but do spice it up with some diversification for rental returns.

Words by Alexander Karolik-Shlaen. From Palace #19.

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