Basil Jet wrote:

Encouraging large numbers of staff to live in a single building outside
the compound seems like a security risk.

Not exactly the same, but it depends on the country. I've seen expat/consulate
compounds in a number of countries, including China. One with detatched homes in
Beijing is overlooked by a Marriott. There's a company called DRC that has
several towers in one of the embassy districts with flats for rent to expats.

Arguably easier to provide security to a compound over individal residences.
Whether it's mandatory to live in them (either by the host country, or embassy
security), I could not say. A director in my company who moved her family to
Shanghai chose such a location for access to schools and western social
opportunities.