Since the global financial crisis, property investors have sought the perceived safety of portfolio diversity and capital growth in global gateway cities, on the premise these economically dynamic and well-connected cities would provide greater liquidity and more stable cash flows than secondary markets, according to MSCI. In its February report, Global Gateway Cities: The Performance Behind the Hype, MSCI asks, “Have these cities, which include London, New York and Tokyo, offered the superior and safer investments to justify their premium pricing?”

In its analysis, MCSI found the office sector in global gateway cities “did not provide superior unadjusted returns over the decade ending 2016, based on annualized total returns.” From 2007 to 2016, for example, 10-year annualized total returns for standing office investments in the global gateway cities of London, Paris, New York City and Tokyo all underperformed “regional gateway cities” (Toronto, Sydney, San Francisco and Seoul), “nationally significant cities” (Johannesburg, Stockholm, Taipei and Oslo) and “other” cities — including Vancouver, Canada; Australia’s Melbourne, Adelaide, Canberra and Brisbane; Auckland, New Zealand; Houston and Austin in Texas; and Lyon and Marseille in France — which typically are smaller, more-secondary markets.

While global gateway cities did provide higher capital growth in general, MSCI found they generated lower income returns than regional gateway cities and nationally significant cities. But adjusted returns for country effects (e.g., interest rates and general economic conditions) painted a different picture, with global gateway cities being concentrated in the top half of performers when adjusting for country market averages, and most “other” cities falling in the bottom half of the distribution. According to MSCI, these global cities also “displayed higher volatility than their national averages, which was not surprising as these markets are more reliant on capital growth. In contrast, smaller cities generally provided more stable returns with lower capital growth.”

For long-term investors, return volatility may be less relevant than for some investors. And investors in larger, more connected gateway markets may expect more secure, predictable and stable cash flows, given a likely broader tenant base and stronger lease covenants, notes the report.

In addition, MSCI indicated country- and city-level trends are important inputs when formulating investment strategy. “Globally consistent data and the flexibility to adjust analysis can help investors better segment geographic areas and improve their understanding of underlying performance drivers,” states the report.

Jennifer Molloy is senior editor of Institutional Real Estate Asia Pacific.