London’s West End has become the world’s most expensive business district, according to the latest Global Occupancy Costs – Offices annual report from DTZ, the London-listed real estate advisor.

The report shows that occupiers in London West End had to pay $23,500 per workstation per annum, which is more than three times the global average. It states that the most affordable office market is Surabaya ($1,610), as it was in 2011, followed by Hyderabad and Chongqing.

“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,” said Richard Howard, head of DTZ West End.

“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,” said Howard.

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.

Across the pond

The GOCO report shows that 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 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). However, 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 and South America (0.6 per cent), Europe (0.9 per cent) and Middle East and 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) saw growth above the global inflation rate. Increases in these regions were driven by Beijing and Jakarta (at 17.7 per cent and 20.7 per cent respectively), according to the report.

In Hong Kong Central, costs decreased by 12 per cent, (from $25,160 in 2011 down to $22,190 in 2012). This was due to rental declines, where occupiers sought to reduce operating costs through downsizing or moving outside the centre.

As a result, Hong Kong, 2011’s most expensive business base, has been overtaken by London West End as the least affordable market globally.

A look ahead

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.

Meanwhile, under the downside scenario, European markets show a sustained period of rental decline, offering cost savings for tenants. In Asia-Pacific, costs are seen to rise by 1 per cent instead of 5 per cent under the base case. This 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 (8 per cent) in rents, whilst both Europe and the US are expected to experience more muted growth.