New world cities offer business cost effective real estate solutions

Hong Kong is the most expensive world class city in which to locate a business, with London in second place and New York a close third, according to new analysis from international real estate advisor Savills published today (Monday 11 March).

The total real estate cost of setting up business in all three cities is now almost three times that in more competitively priced world class capitals such as Shanghai and Mumbai. Sydney now stands out as especially good value and looks set to take advantage of expanding Pacific Rim investment.

Previewing its latest World Cities Review which will be published on March 20, Savills has ranked the top 10 world class cities using a measure of competitiveness based on the total cost of real estate space, both residential and commercial, to accommodate core financial and creative sector business teams.
The analysis includes headline rents and all associated taxes and charges which are often overlooked and can add as much as 53% to the base office rental cost.

The total annual real estate cost for Hong Kong is £1,074,000, for London £973,000 and for New York it is £949,000. These top three cities are followed by Paris at £869,000, Tokyo at £782,000, Singapore at £675,000, Sydney at £602,000, Moscow at £590,000, Shanghai at £371,000 and Mumbai at £318,000.

‘In the intensely competitive global market for top talent, the cost, quality and desirability of a city lifestyle is an important unit of currency,’ said Yolande Barnes, director of Savills world research.
‘Business location choices sometimes have as much to do with where the chief executive officer wants to live as economic considerations, but the cost of residential and commercial accommodation for an international business team can have a significant impact on the bottom line. Our analysis shows the importance of looking beyond headline rents, or assuming that commercial and residential rents work in tandem,’ she explained.

‘A location’s competitive pricing is by no means the only part played in its success as quality of life and business competitiveness will be key factors too but the whole cost sum, and particularly the quality of business premises in a location can have an important impact on the human capital that is such an key part of the knowledge economy. Shanghai, Sydney and Singapore all have among the cheapest total costs of the ten world cities studied but each offers different competitive and business environments. Given their location within or close to the new world centres of wealth generation, they should be well placed for inward investment from both financial and creative sector businesses,’ she added.

Looking forward, Sydney now stands out as offering particularly good value, though it has shown the greatest five year growth with total accommodation costs rising by around 14%. Australia’s new Significant Investment Visa is attracting a significant number of inquiries from Asia, both for residential and commercial investment opportunities, with budgets ranging from AUD5 million to AUD300 million. 

The report suggests that the main obstacle to Sydney’s growth as a world city has been the restrictions on foreign purchasers buying homes. This new visa pathway for migrant investors, requiring the applicant to invest AUD$5 million into complying investments for a minimum of four years before being eligible to apply for a permanent visa, may change this.   Its purpose is to attract investors and may well mean that Sydney’s real estate values outperform many other world cities over coming years.

The report also points out that there can be significant differences between headline commercial rents and the total costs that a tenant pays. Headline rents alone make Hong Kong the priciest for financial sector locations, but London becomes far the most expensive world city, once all fees and taxes are included, at £159 per square foot for a rarefied Mayfair hedge fund location. Yet London is one of the cheaper locations for a creative organisation or tech start up.
The cheapest location, Mumbai, would cost just £27 per square foot. The only other cities to break the £100 per square foot barrier on headline rent plus costs are Hong Kong, Tokyo and New York.

Overall, the growth in total costs since 2008 has been variable. Total real estate costs in most countries have remained roughly similar since the North Atlantic debt crisis struck, although the costs of financial company premises have fallen more. By contrast, creative businesses in Mumbai and New York have faced strong price growth of over 20%, having grown from lower bases on the back of strong economies, while Singapore and Tokyo are as much as 20% cheaper than they were in 2008.
Savills says that the relative ‘cost freeze’ in rents and associated costs is changed by currency fluctuations which have served to make some cities, such as Sydney for example, look more expensive to Euro and Sterling denominated businesses.
Although static real estate costs might be expected in old world cities affected by recession, it is perhaps surprising in view of the high levels of capital growth seen in new world cities.  Barnes believes that this is indicative of a ‘more elastic supply side response in these locations,’ adding that it also reflects the extent of the yield contraction in many new world cities, where rents have not kept pace with capital values.