World cities are victims of own success as high costs price out businesses ⁰

The two highest ranking global cities in the world, London and New York (as measured in the A.T. Kearney Global Cities Index), are also the most expensive for businesses and workers to occupy. According to Savills latest Live/Work Index, which measures the combined cost of residential and office rental per person per year across leading world class cities, the cost of accommodating an employee in London (US$112,800) is more than double that of Sydney, ($49,500). The average total cost of accommodation per worker, per year in the 20 cities that were measured is US$56,855, in a list that includes established world cities and some dynamic up and coming rivals, dubbed “upstarts” by Savills. The rise of the digital economy has pushed these smaller cities, such as Berlin (population 4.3 million) and Dublin (1.7 million) into the realm of world class city status; with San Francisco seeing the greatest price rise over 2015, up by 13 percent, compared to a 9 percent fall in Moscow and Rio de Janeiro.

So, while some of the larger and most prominent world class cities struggle to replicate their most successful city fabric in new places, other cities are emerging into the global spotlight. Real estate recovery has not been universal, but rather concentrated in the cities favoured by occupants and investors in the growing digital and creative economies.

“The productivity of cities and their value to global businesses clearly has a pronounced effect on demand and hence rental costs. The highest ranking global cities, London and New York, are also the most expensive for businesses and workers to occupy. Arguably both are achieving a fair price in relation to their composite world city scores, but Hong Kong looks more fully valued,” says Yolande Barnes, head of Savills world research.

“However, world cities can become a victim of their own success when rents rise to the point where affordability becomes an issue. Rapid urbanisation demands supply elasticity – the test for the top Alpha cities is to supply new business quarters and residential neighbourhoods while capturing the characteristics that made the city attractive in the first place. Growth without social, economic or environmental loss is perhaps one of the biggest challenges facing our world cities today.”

Real estate growth has shifted back from east to west. From 2005 to 2011 new world cities of ‘BRIC’ (Brazil, Russia, India and China) countries: Shanghai, Mumbai and Moscow as well as Hong Kong and Singapore significantly outperformed London, New York, Paris, Tokyo and Sydney. But in the years to 2015 this trend has reversed – as economic growth and wealth creation has slowed in the new world, economic revival has driven real estate recovery in Europe and, most especially, in the USA.

Yolande Barnes comments: “Looking forward, increasing the supply of high quality workspace will be crucial for emerging cities such as Rio de Janeiro, Mumbai and Lagos but this stock might not have to be international-style office blocks if a more local low or mid-tech solution is more appropriate.

The vast majority of workspaces across the globe in both emerged and emerging economies remain small-scale, informal and local buildings rather than international architectural-style, plate glass fronted offices.”

Click to view a Table showing Savills SEU live/work cost rank