Why Are Office Rents So High In Asian Cities?

For many years, Delhi's central business district (CBD), Connaught Place, has been one of the most expensive office space markets in the world. According to property consultancy firm CBRE, Connaught Place is the most expensive office space market in India, and the seventh-most-expensive office market in the world. This is surprising, because Connaught Place does not offer amenities or professional property management comparable to the less expensive office markets of the world.

Many other expensive office markets in the world are in Asia. Mumbai's Bandra-Kurla Complex is at 19^th position, and Nariman Point is 34^th. The most expensive office market continues to be Hong Kong, which has been so for many years. Seven of the top 10 markets are in Asia, and this includes Beijing, Tokyo and Shanghai.

Why is office space so expensive in Asian cities? It is true that some of these cities, such as Hong Kong and Tokyo, are prosperous cities. Beijing is the billionaire capital of the world, with more billionaires (100) than New York (95), according to Hurun Report's annual Global Rich List for 2015. Many of the largest companies in China have their head offices in Beijing. Property is seen as the most valuable asset that people can own. This is one of the reasons why property prices have been rising significantly in the past many years. The demand for property has been high, even after adjusting for other factors, like economic activity and income levels. As people are frantically buying and selling property, property has become unaffordable to most people.

Real estate is seen as a good investment in many Asian cities. This is especially true of India, where a significant fraction of the property of the wealthy is in the form of real estate assets. When investment in real estate assets is higher than in other assets, property prices are bound to rise, relative to income levels. This may partly explain why office space in Delhi, Mumbai, Bengaluru and Kolkata are higher than in far more prosperous cities.

When financial markets are not well-developed, people are more likely to invest in real estate. India's financial markets are underdeveloped, and this may also be a reason why people park their money in real estate. But this does not explain the high rents in cities like Hong Kong, which is a major financial centre.

One of the reasons why Asian cities have high rents would be high density. Asian cities are dense, not necessarily because they are heavily populated. Many parts of countries with dense cities are sparsely populated. High density has more to do with culture. In dense cities, people genuinely prefer proximity over space. Asian cities like Hong Kong, Mumbai, and Delhi are very dense.

Geography could be another reason, especially in the case of cities like Hong Kong, Singapore and Mumbai, which do not have much land at their disposal. But this is not true of Connaught Place. Building height restrictions and rent controls could the reason in the case of Delhi, and this is perhaps the most important reason in the case of Indian cities. Even though the demand for office space is high in the case of Connaught Place, Nariman Point and Bandra-Kurla Complex, real estate developers are not allowed to build more space to meet the demand. So, it is not surprising that prices are very high, even when buildings are dilapidated and short. Office rents in Connaught Place will fall only when authorities allow much taller buildings, and repeal rent control norms that prevent the redevelopment of buildings.  

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