Tokyo has been named the best residential investment market in the world.

According to a new report by Savills, the real estate consultancy, Tokyo is the top world city for investors seeking "above-gilts cash" from residential land, ahead of New York. house for sale

The firm notes that "rental yields in Tokyo look highly attractive in comparison to the extremely low returns available on Japanese government bonds." (High-grade, low-risk government bonds are referred to as gilts.)

On Savills' rankings, Tokyo came out ahead of perennial favorite New York, followed by Paris, London, and Singapore. The "surprise" of the report, according to the company, was Tokyo.

"Tokyo now appears to be a surprising but compelling 'buy' for investors, with a gross yield of +3.9 percent over government bond prices," according to the study.

Savills contrasted the gross rental income received by investors in each city "net of gilts," resulting in a calculation of "residential yields across its world cities, excluding the return on 10-year government bond yields in each country from gross rental returns." This metric assesses how well real estate income performs in relation to the risk environment in the region.

According to the findings, "new world cities" such as Moscow and Mumbai tend to be overvalued, while "old world cities" appear to be undervalued.

"In the first half of 2013, residential rental growth outperformed office rent growth in the world's leading cities, making residential real estate look like a viable investment asset class," Savills said. "Low-yielding cities, where house prices are not underpinned by rental income, may be overvalued," the firm said.

According to the company, New York has the "strongest gross residential yields," at 6.2 percent, compared to 3.4 percent for US government bonds. In addition, rents in the city are continuing to increase.

Gross yields in Moscow, on the other hand, are high at 5.8%, but low when compared to the 7.4% available from government bonds, particularly when the marginal prospects for rental growth are taken into account.

The "net of gilts," according to Savills, reveals "not only where income investors could place their capital, but also how out of synch a city's residential values might be with underlying occupier demand."

"While capital prices have soared, some of the lowest-yielding cities have seen little to no rental rise," says Yolande Barnes, director of Savills research. "If potential rental growth is negligible, these capital values will appear overheated, triggering an adjustment." 

Similarly, if capital prices have not risen as quickly as rental values, this may mean that there is space for capital value growth. If average yields shift in the same direction as London yields, New York has the potential for over 60% capital growth."

Tokyo, according to Savills, has significant capital value growth potential, but it is "unlikely to be realized" because it is "more domestic and less globally invested than New York and London."

Despite this, the company predicts that "substantial, double-digit growth is probable in Tokyo over the next three years."