What is Occupancy Rate
Investors who are beginning to learn how to invest money in Singapore often come across the portfolio occupancy rate. However what does this actually mean. Occupancy Rate is the ratio of rented to total floor area. The way floor area is calculated can vary. For a Mall, property managers have the choice of using GLA or NLA. For a hotelier, they may choose to express the GLA in terms of number of keys/ rooms. Regardless of the denominator that the manager chooses, investors often prefer to see a higher occupancy rate as compared to a lower one as it means that the property is running at full capacity and generating more Net Operating Income. However, it does not always mean that a high occupancy rate means an increase in net operating income.
Occupancy Rate as the inverse of Vacancy Rate
At times, property managers will talk about vacancy rate instead of occupancy ratio. Vacancy Rate is essentially the number or amount of floor area that is not leased / total lease area.
Why Occupancy Matters
Occupancy rates are important to real estate investors because it is a indication of how utilised the property is. If the property has an occupancy rate of 95%, it will mean that the property is running at close to full capacity. This means that the owner of the property is maximising the amount of rental income that he/she is generating from the property. When looking at occupancy rate, it is important to note that it is difficult to achieve 100% occupancy. Hence, one has to see the property’s occupancy from the point of view of the industry’s average occupancy.
Even if the property has an 85% occupancy and the industry average occupancy is at 80%, the property is being managed much better than its peers. More often than not, the property cannot fight larger macroeconomic trends.
Is Higher Occupancy Always Better
For one, higher occupancy does not always guarantee that the property is generating more net operating income. In fact, if higher occupancy was the only metric, it may actually lead to a reduction in top line revenues. One way to think about it is a hotel, which gives free rooms to its customers. While the hotel remains fully booked, the hotel also books additional expenses for the upkeep of these ‘free rooms’, thereby leading to a lower net interest income. Hence, when looking at occupancy numbers, it is important to also look at the same-store revenue growth. This is because, occupancy really translates to higher net operating income if the property manager either maintains same store revenue or increases it.
It is also worth noting that in the world of real estate, demand begets demand. Having high occupancy often leads to a perception of healthy demand for lease space/ rooms in the property. This in turn provides support for the rental rates that the property is charging.