Research article

Property costs in Europe

The real estate costs of a city have to be weighed against the productivity of that city for any organisation. Residential real estate may cost a company more overall than workspace

Le Septième Quartier in Paris

▲ Le Septième Quartier in Paris

It is tempting for real estate professionals to think that office property costs are a major factor in location decisions made by footloose multinational corporations. But they can pale into insignificance in the war for talent, as the need to attract and retain key staff in a particularly popular location takes precedence. Accommodation costs can also look insignificant against salary and other staff costs.

When thinking about the costs of accommodating a business in the city, most real estate managers will consider the headline office rent per square metre. Few consider that half as much again might be added on top of this by service charges and taxes. These costs constitute on average 22% of workspace costs across our European cities.

Even fewer property managers will consider the pressures that might be put on salary demands because of the cost of homes for their workforce. Residential accommodation per worker will cost, on average, nearly seven times the office accommodation. As the HR departments of relocating corporations begin to hold more sway in location decisions, we expect more heed will be paid to this.

Savills Executive Unit

In order to give a more useful idea of accommodation costs in European cities, we have measured the rents, property-related taxes and service charges associated with the workspace needed for seven people as well as the rental cost of the homes they live in.

These are the same seven people located in each city, so the data is comparable, and consist of one expat CEO, one expat director, one local director and four local administrative staff.

We have located this Savills Executive Unit (SEU) in two types of location in each city, one is the dominant ‘creative quarter’ of each city and the other is the type of office and location that might be occupied by a hedge fund.

This means that rents are not always the prime, Grade A, financial sector headline rents usually quoted, but instead are typical of the sort of space that SMEs and international company branch offices might take, plus the relevant variety of residential areas their staff will occupy.

Figure 8

FIGURE 8Live/work accommodation costs

Source: Oxford Economics, Savills World Research

Is prime Grade A still relevant?

In all our cities, rents paid for offices in the financial district are always higher than those paid in the creative quarter. This reflects the dominance of financial services in these city economies in recent years and the rents being paid reflect the profitability and growth of that sector.

In many cities, creative and tech industries are growing faster than the traditional financial services sector. This raises the question as to how useful most occupiers will find the much-quoted prime Grade A rent per square metre figures beloved by realtors.

Not all of today’s tenants need prestigious towers to house their operations and an increasing number are actively seeking to attract human talent in good neighbourhoods rather than display wealth on the skyline. Sometimes a stripped-back industrial building will be more desirable to a tech or creative company, for example. These tastes and preferences will be increasingly reflected in rents and the notion of what makes a prime location and what constitutes high-grade spec will then change. Already in London, rents on the fringe of the city, favoured by tech, have equalised with the traditional financial sector rents of the City of London.

In most cities there is a divide opening up between the rents paid by small, specialist premium financial organisations like hedge funds and the corporate financial sector like banks, pension funds and insurance companies. This premium finance sector is shown on Figure 9 in comparison with rents in the creative sector and start-up tech. The difference is largest in London and Frankfurt suggesting the specialist financial sector companies have inflated their habitat over the norm.

Figure 9

FIGURE 9Headline office rents euros per square metre, Dec 2016

Source: Savills World Research

Frankfurt’s financial sector dominates the creative sector

▲ Frankfurt’s financial sector dominates the creative sector

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