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London West End

London’s West End most expensive office space in the world, says DTZ report

The cost for companies to provide office space for their workers in North Asia increased by 6.3 per cent during 2012, outstripping the global average increase of one per cent, according to a survey carried out by DTZ.

The 16th annual Global Occupancy Costs - Offices (GOCO) report highlights significant regional differences – while some markets saw sustained growth, others such as the US experienced weaker levels of demand due to economic and political uncertainty.
DTZ’s report analyses the main components of occupancy costs per workstation across 126 business districts in 49 countries across the globe, ranking each location based on costs per workstation per annum. It includes rents and outgoings, such as maintenance costs and property tax, and takes into account variability of space utilisation standards by measuring costs on a per workstation basis rather than just per square metre.
The US offered occupiers the greatest opportunities to reduce their overheads in 2012, with occupancy costs per workstation falling by 10.9 per cent. This was driven by an 11.8 per cent decrease in space utilisation – the amount of space each worker is allocated – with the biggest decreases recorded in Washington DC (-17 per cent) and Los Angeles (-14 per cent). Even with the move to greater space efficiency, the US still has the most space per employee on average.
While growth was recorded in Central & South America (0.6 per cent), Europe (0.9 per cent) and Middle East & Africa (1.4 per cent), this remained below the global inflation rate of 3.2 per cent. In contrast North Asia (at 6.3 per cent) and South Asia (3.7 per cent) witnessed growth above the global inflation rate, due primarily to strong domestic consumption and activity from non-financial sectors eager to tap into the region’s brighter growth prospects. Increases in these regions were driven by Beijing and Jakarta (at 17.7 per cent and 20.7 per cent respectively).
Karine Woodford, head of occupier research at DTZ, says: “The US was undoubtedly one of the stories of the year, with occupancy costs per workstation falling in every city. Demand for space was low, reflecting a sluggish labour market and weak corporate sentiment, but the biggest reason for the decline was a trend across the board for greater space efficiency. We do however expect US occupancy costs to increase over the next two years, albeit at a muted rate compared to elsewhere in the world.
“Elsewhere, there will be opportunities in the next two years for occupiers seeking to establish Asian operations in Kuala Lumpur and Singapore, where we anticipate costs to fall by 1.3 per cent and 0.7 per cent respectively. However, it should be noted that vacancy rates in Singapore are currently at their lowest level since 2008, and we expect costs to rise steadily over the longer term.”
Growth in North Asia was not without exception as costs decreased by 12 per cent in Hong Kong Central (from USD25,160 in 2011 down to USD22,190 in 2012). This was due to rental declines, where occupiers sought to reduce operating costs through downsizing or moving outside the core.
This resulted in Hong Kong, 2011’s most expensive business base, being overtaken by London West End as the least affordable market globally. Occupiers in London West End had to pay USD23,500 per workstation per annum which is more than three times the global average. The most affordable office market is Surabaya (USD1,610), as it was in 2011, followed by Hyderabad and Chongqing.
Richard Howard, head of DTZ West End, says: “These figures are a tangible reflection of the fact that London is a highly attractive place to locate a business. It should be observed, however, that the West End alone has many different characteristics and price points. While boutique specialist financial sector companies are happy to pay a premium to be based in one of the world’s premier business districts, recent transactions involving Google, Expedia, Skype, Facebook and LinkedIn have all been at a considerable discount to Mayfair prices, reflecting the vibrancy of their distinctive locations. DTZ has advised on the disposal or acquisition on each of these transactions.”
As well as prime office space, DTZ also analysed occupancy costs per workstation for average-grade buildings in 14 major centres in Europe and Asia. Driven by increased demand from cost-conscious occupiers, secondary occupancy costs rose by 4.2 per cent year-on-year – above global inflation and four times the rate for prime. The difference in occupancy costs between secondary and prime office space also varied hugely across the different markets, with prime anything from 17.5 per cent more expensive (Stockholm) to 131 per cent more (Shanghai).
Woodford says: “In the current economic climate, occupiers are increasingly looking at alternatives to prime office space. The biggest differences can be seen in Shanghai and Moscow, where occupying prime costs over 100 per cent more than taking space in an average grade building. In markets such as Stockholm, London City and Sydney the difference in cost in occupying prime compared to secondary is less pronounced, although cost savings of at least 20 per cent can be achieved. London West End is the least affordable location in the world for occupying both prime and secondary office space.”
The GOCO report also looks ahead at occupancy costs for the next two years under three different scenarios: base case (policy makers do enough to avoid a deep recession), downside (based on a multiple eurozone exit) and upside (a global corporate reawakening). Under the base case scenario, global occupancy costs are expected to increase by 2.3 per cent over the next two years, with occupiers in North Asia witnessing the highest growth rate – at levels above the global inflation average in both 2013 and 2014.
Under the downside scenario, European markets show a sustained period of rental decline, offering cost savings for tenants. In Asia Pacific, the impact is felt more dramatically with costs rising by one per cent instead of five per cent under base case which provides a window of opportunity for occupiers to re-negotiate leases before rental growth accelerates. However, under the upside scenario, Asia Pacific is the region which shows the largest increase (eight per cent) in rents, whilst both Europe and the US are expected to experience more muted growth.

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