DTZ: European Office Affordability Index 2009

Introduction

For any business, property costs are an important component of total expenditures. In the retail and residential property markets, the affordability of a property is measured by comparing occupancy costs against total turnover or revenues. When property costs rise above a certain percentage of revenues, premises become unaffordable, triggering market corrections.

– Understanding the relationship between property costs and turnover is therefore essential in forecasting future market adjustments and assessing development potential.

– By relating total occupancy cost to the average turnover or GVA per employee, the
European Office Affordability Index provides a unique insight into the future direction of the European office market. It also gives a clear idea of the size of the adjustment that is required in the marketplace.

– The European Office Affordability Index is defined as the percentage of revenue per employee spent on office accommodation in each main European market.
Occupancy Cost per desk = (Rent + service charges) x space use per desk
Services sector Gross Value Added (GVA) per city is taken as a proxy for turnover
Office affordability Occupancy Cost per desk Average turnover per employee.

Key findings

– On average, European occupiers spend approximately 16% of their total turnover on office occupancy costs.
– However, there are great disparities across the continent. While cities with high GVA and low accommodation costs, such as Brussels or Vienna, remain very affordable (with occupancy costs representing only 10% of output per head), this number reaches 30% in Madrid where GVA is lower.
– Office affordability pressures are also high in emerging Europe. Occupancy costs as a proportion of GVA per head are higher than in western Europe.
– In Moscow, there has been a complete disconnect between domestic economic performance and the state of the office market. Occupancy costs have tripled in Moscow in the last five years.
– Affordability pressures remain below the European average in the City of London! This is explained by both very high output per employee but also very rational use of space per desk compared to the rest of Europe.
– There is a strong correlation between affordability pressures and space allocation. In cities with high affordability pressures, occupiers are adapting by either reducing the space allocated to individual workers, or by turning to secondary locations.

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