February 22, 2016
The British Council for Office (BCO) has released a new report which questions the commercial property industry’s commonly ‘accepted wisdom’ that if you break down overall business operation costs, 80 percent of the total goes on salaries and 10 percent on property, with other expenses making up the rest. The BCO’s analysis has found that a more realistic split is 55 percent (salaries), 15 percent (property) and 30 percent (other business costs). So while salaries continue to dominate overall costs, property and non-property business costs play a greater role than the commonly received idea. The BCO believes this clearer understanding of how much property represents of overall business costs will now change, influence and underpin business decisions. This new analysis may also have an impact on rental forecast and could also affect the impact of changing business rates – affecting what organisations may be able to afford.
Bill Page, Chairman of BCO Research Committee and Business Space Research Manager in Legal & General Investment Management’s Real Assets team, “The property industry has relied for many years on an informal ‘rule of thumb’ to describe the role played by property in overall business costs.
“As a result, the BCO set out to present a more robust benchmark to support or replace this assumption. Ultimately, our analysis found that while salaries continue to dominate overall costs, property and non-property business costs play a greater role than accepted industry wisdom. The BCO believes this clearer understanding of the proportionate cost of property on the balance sheet will ensure organisations are more informed when making decisions about their property portfolio, while investors can better appreciate the implications rental growth has to affordability.”
Because the evidence base behind the 10 percent property claim was questionable; the BCO invited MSCI Global Occupiers and Ramidus Consulting to undertake a brief exercise to explore the evidence and present a robust benchmark to support or replace this theory.
Annual Business Survey data from the Office for National Statistics (ONS) were used to build the most comprehensive picture of business costs in four key sectors representing ‘the office economy’, namely: Information & Communications; Real Estate; Professional, Scientific &Technical Activities; and Administrative & Support Services. These represent around six million jobs nationally, or 20 percent of all jobs. For the analysis the BCO focus on businesses costs, which break down into purchases, taxes and employment costs.
The analysis showed that the four key sectors have a combined total business cost of around £429 billion, including £244 billion of purchases (including ‘Other services’); £178 billion of employment costs and £6 billion of taxes. ‘Other services’, which include property rent, represent 26 percent of total business costs.
For more information and to request a copy of the report click here.