World’s Tallest Building: Capital Misallocation?

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It’s easy to be enthralled by tall buildings. They loom over the most modern cities on the planet, multiplying by many times the amount of usable floor space available from a certain area of land.  For many they stand as physical monuments to cultural economic and financial success, from the Pyramids of Ancient Egypt to their shiny modern equivalents in Dubai, Shanghai.  The competition for “the world’s tallest building” moniker has been contested internationally since the 19th century, when public attention focused during the debate over the Eiffel Tower’s construction in Paris.

This week The Diplomat’s Asia Life blog drew attention to the estimated completion date of the soon-to-be latest “world’s tallest building” in Changsha, China. It also noted that the “world’s largest building” was also recently completed in China’s Chengdu City. As a final case in point, China announced a USD 42billion investment to revive the world’s longest undersea tunnel project – linking Shandong and Liaoning provinces under the Bohai Gulf.

It was more than fourteen years ago that Andrew Lawrence brought up the topic of the “Skyscraper Index”. The (admittedly disputed) index suggests that the very capital intensive process of designing and constructing world record-breaking (we could extrapolate to include “largest” and “longest” on top of Lawrence’s “tallest” category) buildings is a sign that funds are being malinvested, and that such vanity projects are thus a sign of impending financial or economic crisis.  The theory was considered further by Mark Thornton in 2005 (available here) and also highlighted in Vikram Mansharamani’s excellent book Boombustology.   

To give a few commonly cited tallest building record holder examples: New York’s Empire State Building was begun in the financial bubble that led to the Wall Street Crash of 1929; the Petronas Towers in Kuala Lumpa were completed in 1997, the year the Asian Financial Crisis struck; Taibei 101, Taiwan’s iconic building began construction as the world marched towards the Dotcom meltdown; and the Burj Khalifa in Dubai began construction during the Emirate’s real estate bubble, which finally burst dramatically during the Global Financial Crisis.

The misallocation of credit associated with record-breaking buildings is a hotly contested topic. As China sets to retake the tallest building crown after a near miss with the Shanghai World Financial Center, the over-investment issue will again spring to mind.  Whilst holding a world record can attract users to a building (and thus actually increase value), historically the commencement of many of the world’s most iconic tall buildings has aligned with serious local or global financial distortion.

Comments
3
Oro Invictus
July 26, 2013 at 00:24

Without any commentary on whether this project is a good idea or not, I would like to point to this update: Construction has been stopped, on this massive 5.2 billion yuan project that has been advertised like crazy, because the developers hadn’t got planning permission from the local government .

This does not bode well.

http://www.scmp.com/news/china/article/1290392/china-stops-work-worlds-tallest-building-changsha

Derek
July 24, 2013 at 15:49

While usually this is the case, the purpose of the Changsha Sky-City appears to be more of a technology demonstrator and advertisement for the construction company Broad Sustainable Building rather than misallocated capital.

The first truly large-scale use of pre-fabrication to massively reduce the cost and build time of super-tall structures would really be something revolutionary.

Marcus
July 24, 2013 at 09:54

I don't know if the very small sample size of "tallest building" projects and economic crisis are more a sign of our hubris or that the economy is simply prone to crisis

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