Why Apartment Rental Prices in Developing Countries are So High?

In most developed countries, the renting of residential property (apartments) provides the owner with an annual income equal to 2-3% of the value of his or her real estate. In developing countries, owners make 6-7%. An apartment selling for 100,000 euros will often rent for 7000 euros a year. One pays the same to rent an apartment in Skopje, Macedonia and in Berlin, Germany even though, in Berlin, apartments are three to five times more expensive to buy.

Why this excess yield?

Five reasons:

(1) Limited supply. Despite the construction craze of recent years, there is still a shortage of apartments, especially properties to let.

(2) Criminals and politicians, whose sources of funding are unlimited, jack up the prices and rarely bargain. They use other people's money to pay for their luxuries and don't care to save or to secure a reasonable price.

(3) Foreigners who live in developing countries are usually employed by NGOs, international financial institutions (IFIs), and multinationals. Their employers pay their expenses and have little time and inclination to haggle over the rent in a crowded market. They pay the asking price every time.

(4) Yuppies - young, upwardly mobile entrants to the workforce, employed mainly in the financial services industry - earn 3 to 6 times the average salary and can afford to pay exorbitant rents.

(5) The process of urbanization in developing countries is unrelenting. Tens of thousands of peasants and villagers relocate to the cities every year, with capital cities or commercial centers their main destinations. They support rental prices by increasing the demand, although they cannot usually afford the more expensive apartments.