New Zealand Property Occupancy Costs and Rental Affordability

Occupancy cost ratio metrics are widely used in the retail property sector, primarily shopping centres, to measure occupancy expenses relative to sales or income.  While the relationship between occupancy cost and an occupier’s revenue isn’t as closely related for most industries that occupy office and industrial premises, nonetheless it remains at least an implicit consideration.  Accordingly, we undertook an exercise to determine the occupancy cost ratios of different office and industrial sectors in New Zealand, seeking insight into the following;

• How rent fits into the broader range of outgoings for companies.
• How market rents changed over time relative to company revenue and other costs.
• How occupancy cost ratios for individual companies compare to industry averages.
• What these insights imply for rent affordability and growth.

The results show that property expenses represent a small portion of company outgoings, averaging 3.5% for office-based industries and 2.3% for industrial property-based industries. The overall averages however disguise substantial variations at both the sub industry and individual company levels.  Comparing company revenue and expenditure trends to rent growth trends provides a take on affordability.  

Our analysis suggests that, although subject to short-term cyclical fluctuations, with the past couple of years indicating declining affordability, over the longer term, affordability has not been a barrier to growth in commercial real estate market rents.  We believe that supply-demand dynamics and the skills of building owners and managers play a more important role in driving rent growth.