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A general view of the Hong Kong Island skyline is seen from the Peak in Hong Kong in this June 16, 2007 file photo.BOBBY YIP/Reuters

London surpassed Hong Kong as the world's most expensive city for companies to locate employees after rents climbed and the pound appreciated against the U.S. dollar.

London real estate costs, which combine residential and office rents, climbed 5.3 per cent in dollar terms in the first half, Savills PLC, a property brokerage based in the U.K. capital, said Tuesday in a report. Companies pay an average of $121,000 (U.S.) a year to employ someone in the city, the report said.

Rents are climbing and the strengthening pound has been a major contributor to London's rise in the rankings, Savills said. The pound has climbed about 1.8 per cent against the dollar in a year.

"The vitality of central London locations are at risk as they become too expensive for the types of occupiers that made them attractive in the first place," Yolande Barnes, a director at Savills, said in the report.

By contrast, falling rents and a weakening currency pushed Hong Kong to second place after five years at the top of the ranking. It's followed by New York and Paris. Hong Kong real estate costs declined 5.6 per cent in the period, cutting the cost of an employee to $116,000 a year, according to the report.

New York real estate costs declined 1.7 per cent. Companies pay an average of $107,782 per year to have an employee living and working in the city.

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