Research article

Counting the cost

Variations in location and business sector can dramatically alter the price of global real estate.

Most international comparisons of corporate real estate focus on a very narrow measure of cost, often just comparing the price per square metre or square foot of prime Grade A office space. This headline measure is inadequate because the reality of business premise occupation is that it varies greatly from city to city and from sector to sector. By no means will all businesses occupy the same types of space in the same locations within a city. In addition, the amount of space taken up by the same people will vary enormously from country to country. Office workers are more likely to be densely packed in Tokyo, for example, but use far greater space in Dubai.

In addition to commercial property costs, employers are also very interested in the cost of living accommodation for their workers. They will bear in mind that it may be easier to attract top talent to the best, most vibrant and exciting cities but that those cities also need to be liveable. Upward pressure on wages may be particularly strong in locations where the cost of residential accommodation is high.

The total Savills Executive Unit (SEU) measure of accommodation costs takes all of this into account, as well as the additional costs of occupying property, such as local taxes and rates.

Taking the lead

Hong Kong is the world’s most expensive city in which to locate employees, ranking ahead of London, which is virtually on a par with New York. These cities have spent the past two years vying for second place – some way below Hong Kong. Paris completes the list of the top four cities, where it costs more than US$100,000 a year per employee to rent living and working space.

The average live/work expenditure for all 12 world cities (see fig. 3) reveals that it now costs just under US$76,000 a year per employee to rent residential and office space in a world city. This cost has risen 21% since 2009, when most world city rental markets bottomed out. Hong Kong is 1.6 times more expensive than Singapore, which has almost exactly average world city rents, as do Tokyo, Moscow and Dubai. The cheapest cities in our survey are Rio and Mumbai, which are 60% cheaper than the average and less than a quarter of the price of Hong Kong.

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Figure 3

While total costs remained broadly stable across the index over the past year, there were exceptions. Costs rose by a stratospheric 
41% in Dubai, albeit from a low base, to rank the city as the seventh most expensive. We expect that this rise will mean the high accommodation standards, in terms of the office space occupied, may start to reduce 
in response. By contrast, total live/work accommodation costs fell by 12% in Mumbai during 2013, which ranks as the cheapest location. Hong Kong costs also fell modestly in 2013, by 1%, although not nearly enough to knock it off its number one perch.

These findings go some way to demonstrate the rebalancing of the world’s economies as the more mature ‘old world’ cities show stable growth in this recovery cycle. ‘New world’ city growth has slowed markedly, although this has been slightly counterbalanced by the emergence of the new entrants – Rio and Dubai.

In the second half of 2013, ‘new world’ office costs rose by 7.6%, while ‘old world’ residential costs grew by 4%. Rents in the office markets of ‘new world’ cities have been, on average, below their 2005 levels but are now picking up momentum. In contrast, ‘old world’ rents did not fall as far and have since recovered, albeit more slowly than the ‘new world’, to above 2005 values.

Savills Live/Work Index
Making space

Generally, the cost of space occupied by creative industries (including tech companies) is lower than that of financial service companies (see fig. 4). However, this discount varies significantly across world cities, being virtually non-existent in Paris and Sydney, while Moscow, Hong Kong and London have alternative office space in the creative/tech sector at much lower rents, which reduces total live/work costs by over a third to nearly half that of financial sector costs.

This highlights the folly of measuring only headline rents – the top rents in prime locations – in order to establish corporate occupancy costs. For example, a tech company in Paris and New York will be paying more than it would in Hong Kong, despite the fact that financial sector rents in Hong Kong are the highest.

Our ‘financial sector premium’ measure is 
a good indication of how heterogenous business-space markets in our world cities are. It is easier to find cheaper space in some of the cities with high headline rents than it is in some of the cities that look cheapest by the headline rent measure.

Hong Kong is the world’s most expensive city in which to accommodate financial sector staff, who each occupy live/work space costing an average of US$144,000 a year, but it is only the third most expensive for creatives. Paris, meanwhile, ranks fourth most expensive for financial services companies, but is the most expensive for tech and creatives. London is second most expensive for accommodation costs in the financial sector – with a per person cost of US$133,000 – but this is a premium of 36% over the city’s creative sector space, where it ranks only fourth in our world city cost league.

The biggest financial sector premium is seen in Moscow, where Russian money 
is once again returning to invest and has pushed up demand for space in the city. Similar forces also seem to be at work in Dubai, where the impact of Middle Eastern cash can be seen in a market that has shown significant growth, despite cooling measures.

Figure 4
Currency exchange

Exchange rates are an important additional factor that impacts directly on the assessment of global live/work costs. Savills World Cities Index is always measured in local currency and then converted into US dollars at current prices so that the impact of exchange rate fluctuations are eliminated. However, for both investors and occupiers who operate and/or remunerate expatriates and other employees in a non-local currency, the impacts of these fluctuations are important.

The effect of currency movements has exaggerated the cost changes in different world cities over the past five years (see fig. 5). The strength of the Chinese renminbi and the Singapore dollar mean that cost increases have been amplified – in fact they have nearly doubled.

Figure 5

Meanwhile, cost falls in US dollar terms have been much greater in Tokyo and Mumbai than in their local currencies. The huge nominal increases in Rio have also been significantly ameliorated by the weakness of the Brazilian real.

It is not just currency fluctuations that cause uncertainty for corporate occupiers in 
world cities. Market variations also make a difference (see fig. 6). Here, we have measured how cost growth, together with its variability, has differed between the world cities since 
2009. It shows that the more predictable 
and low growth markets have been those of Tokyo, Sydney and Paris, while high growth and unpredictability have been amply demonstrated in Dubai and, to some extent, Hong Kong.

From an investor’s point of view, given that rental income across residential and commercial properties makes up a high proportion of the live/work index, the best markets with high, stable growth have been Rio, New York and Moscow, while the worst has been Mumbai, with low overall growth masked by a great deal of volatility.

Figure 6


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