Real estate is just one of the many costs associated with setting up, expanding or relocating global businesses. While it is unlikely ever to be the sole motivating or deciding factor in the choice of a city, it is increasingly significant for a number of industries, but in a way not seen before.

Staff have become the single most important asset for many organisations in all parts of the world, particularly in the service sector. Consequently, the quality of the environment in which employees work and live has become a key success factor for those industries. In the intensely competitive global market for top talent, the cost, quality and desirability of a city lifestyle is an important unit of currency.

Making a comparison

We have looked at the relative competitiveness of our 10 world cities, not only on the basis of the annual rental costs associated with office and residential accommodation, but also the additional costs like service charges, local taxes and other items that might be associated with such tenancies. We have looked at this for two different types of employer, using our “Savills Executive Unit” as a unit of comparison in each case (see above).

As usual, Hong Kong ranks number one in total annual real estate costs (see below), roughly three times the cost of locating in Mumbai or Shanghai. The big surprise is the position of New York as the third most expensive city by this measure. While headline residential capital values look cheap by international standards, rents have grown fast and the taxes and other costs associated with occupancy are high.

A measure of success

The total costs measure reveals that most of the “new world” is relatively cheap, with Sydney standing out as a particularly good value “old world” city, well placed to attract expanding companies in the Pacific region. This is perhaps why it has shown strong growth in total costs since 2008, backed by a strong demand, in turn buoyed by a strong local economy and advantageous regional positioning, as well as all the safety, stability and transparency of an established market. We may well see Sydney becoming an increasingly global city as it proves attractive to new and expanding businesses on the Pacific Rim. The main obstacle to this is the city’s restrictions on foreign purchasers buying homes. Some choices of business location have as much to do with where the CEO wants to live as economic considerations.

Different types of company have different requirements, so we have also compared the costs for both a financial and creative SEU company to live and work in each city (see below), with differing and sometimes surprising results.

Variable growth

Overall, the growth in total costs since 2008 has been variable. Premises for creative businesses in Mumbai and New York are over 20% more expensive now, having grown from lower bases on the back of strong economies, while Singapore and Tokyo are up to 20% cheaper. Total real estate costs in most countries have stayed roughly similar since the North Atlantic debt crisis struck, although the costs of financial company premises have cheapened more – suggesting demand has increased further among new creative industries.

The relative cost freeze in rents and associated costs is changed by currency fluctuations (not shown), which have served to make some cities, such as Sydney, look more expensive to euro- and sterling-denominated businesses. Although competitive and static real-estate costs might be expected in recession-hit “old world” cities, it is perhaps surprising in view of the high levels of capital growth seen in “new world” cities. Generally, we see this as indicative of the more elastic supply-side response in these locations, which have suppressed rental growth, despite an influx of investor equity. It also reflects the extent of the yield contraction in many “new world” cities, where rents have not kept pace with capital values.

Taken from
Insights: World Cities Review Spring 2013

View our exclusive World Cities Review video report