What is a good occupancy cost ratio for a retailer?

Each kind of shop carries a different share. A business with low gross margins, such as a supermarket, can afford only a small share of sales for occupancy; a high-margin specialty retailer can carry much more. A reader compares a store with others in the same category, in similar centres, and with its own past, and asks how much sales could fall before the store stops contributing. A ratio that has risen steadily matters more than any single year's level.

What costs are included in occupancy costs?

Usually base rent, any turnover rent, the outgoings or service charge the tenant pays for the building's running costs, and any marketing or promotion levy. In the UK, business rates are also a cost of occupying the shop. Definitions differ: the Shopping Centre Council of Australia's guidelines, for example, exclude other tenant costs and benefits, so a fit-out contribution from the landlord does not reduce the reported figure. A reader should check the definition behind any published ratio.

Why do shopping centre landlords collect tenants' sales?

Because a lease with turnover rent needs the figure to calculate the rent, and because sales show the landlord which tenants are trading well and which may struggle to renew. Collected across the centre, they also show which categories are growing and what rents the centre can sustain. Some laws limit what the landlord may do with them: Victoria's retail leases law, for example, restricts passing on individual tenants' turnover.

How does GST affect the occupancy cost ratio?

It depends on the convention used. Australian shopping centre reporting under the industry's guidelines divides occupancy costs excluding GST by sales including GST, which gives a lower ratio than dividing both excluding GST. A store with US$1.0m of sales before GST and US$185,000 of occupancy costs reports 16.8% on the first basis and 18.5% on the second. A lender comparing a centre's figures with a retailer's own should put them on the same basis first.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Occupancy Cost Ratio: a Worked Example

Rent is paid out of sales before anything else is.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07 · 6 MIN READ

// THE SHORT ANSWER

Before a retailer pays for stock, staff or its own borrowing, a share of every sale goes to the landlord and the building, and the occupancy cost ratio is that share. Rent, turnover rent, outgoings and other charges of occupying the shop are added up for a year and set against the year's sales from that shop. Because rent is fixed and sales are not, the ratio rises when trade weakens, which is why lenders on both sides of a lease read it: one to find the stores a chain is carrying, the other to judge which rents will survive the next renewal.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 08 — Basalt Ridge Developments. A new-to-bank developer, a claimed 28% ROE and two other banks circling. Your bank has a growth target. Your call first, then the senior banker's.

Read the file →

PART OF Property Development Finance

// 01 — WHY A LENDER READS COST AGAINST SALES

Rent is fixed and sales are not. A shop's lease sets what it pays the landlord whatever it sells, and in a retailer's accounts occupancy is often the largest cost after stock and staff. When sales fall, occupancy costs take a larger share of each dollar, and a shop that made money at last year's sales can lose it at this year's. The ratio puts that pressure in one number that can be compared across stores, centres and years.

The two lenders want the same number for different reasons. A retailer's lender is lending against the whole chain's cash flow and wants to know which stores drain it. A centre's lender is lending against rent, and wants to know whether the tenants paying it can afford to keep doing so when their leases come up.

// 02 — HOW THE RATIO IS BUILT

Occupancy cost ratio = total occupancy cost for 12 months ÷ sales for the same 12 months

Occupancy cost = base rent + turnover rent + outgoings or service charge

+ marketing or promotion levy (+ business rates in the UK)

The definition matters as much as the arithmetic. In Australia, the Shopping Centre Council of Australia's industry sales reporting guidelines count base rent, outgoings, turnover rent and promotional contributions, exclude other tenant costs and benefits, and divide charges excluding GST by sales including GST. With GST at 10%, that convention reports a lower ratio than a like-for-like comparison would. In the UK, business rates, payable by the occupier, are a large part of the cost and belong in the ratio. A reader comparing figures across centres or countries should rebuild them on one basis.

Turnover rent changes the ratio's behaviour. A lease that charges a percentage of sales above a threshold moves part of the rent with trade, so the ratio rises less when sales fall. Incentives work the other way: on a reading of the SCCA guidelines, which exclude other tenant costs and benefits, a fit-out contribution does not reduce the reported cost, so a shop's effective rent can be lower than its ratio suggests.

// 03 — THE EXAMPLE

A jeweller with nine stores in Australia, constructed for this page like every figure in it, asks its bank to renew a working capital facility. The bank asks for store accounts and picks out three. Sales are shown excluding GST; the margins and costs are the example's, not a market norm.

Sales Rent Outgoings Levy Total Ratio

Store A, city centre 2,000,000 210,000 40,000 10,000 260,000 13.0%

Store B, regional mall 1,000,000 150,000 28,000 7,000 185,000 18.5%

Store C, strip shop 800,000 70,000 12,000 – 82,000 10.3%

Store B on the centre's basis (sales including 10% GST):

185,000 ÷ 1,100,000 = 16.8%

The same store reports 16.8% in the centre's figures and 18.5% in the retailer's. Neither is wrong; they answer on different bases. The question for the bank is what store B contributes:

Today Sales down 10%

Sales 1,000,000 900,000

Gross margin at 50% 500,000 450,000

Staff − 190,000 − 190,000

Other store costs − 40,000 − 40,000

Occupancy − 185,000 − 185,000

Store contribution 85,000 35,000

Occupancy cost ratio 18.5% 20.6%

A tenth off sales takes three-fifths off the store's contribution, because none of the costs below gross margin move. Store A, at 13.0%, has more room before the same fall bites, though its own staff and margin decide how much. The bank's reading is that the chain's cash flow depends on a few stores like B, and its next questions are when B's lease ends and what the landlord would accept to keep the jeweller.

// 04 — WHAT A LENDER READS BESIDE IT

The ratio has no meaning without the category. A supermarket on thin margins and a jeweller on wide ones can carry very different shares of sales as occupancy and both be sound, so a reader compares a store with others of its kind, and with its own history, rather than with a single figure. Rent cover asks a related question from earnings rather than sales: how many times the occupier earns its rent. For a shop, where landlords often see sales but not profits, the occupancy cost ratio is usually the one available.

DEFINED IN ONE PARAGRAPH → · HOW BANKS READ RETAILERS → · RENT COVER, WORKED →

// 05 — WHERE IT DECIDES A FILE

For a retailer, the ratio sorts the store list into the stores that carry the chain and the ones it carries, and the lease dates show when each can be changed. A lender may ask for store-level reporting as a condition, read the lease expiry profile beside the ratio, and treat a plan to close or renegotiate high-ratio stores as part of the case rather than a threat to it.

For a centre, a rising ratio across a tenant group is an early sign that renewals may come in at lower rents or with larger incentives, and that some of today's rent roll is over-rented. The lender's data has limits. In Victoria, for example, the Retail Leases Act 2003 bars a shopping centre landlord from passing on a tenant's turnover figures without the tenant's consent, although it may give them to a financier in a form that does not identify the tenant, or as aggregate figures for the centre. A centre's lender often reads the ratio by category, not shop by shop.

THE RENT ROLL, READ → · OVER-RENTED PROPERTY, WORKED → · CONTRIBUTION MARGIN →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Shopping Centre Council of Australia, Sales Reporting Guidelines, December 2010 — section 2.5 Occupancy Cost Measures — Defines the ratio as twelve months' occupancy charges excluding GST over sales including GST, with charges of base rent, outgoings, turnover rent and promotional contributions and other tenant costs or benefits excluded — sections 02 and 03.
Retail Leases Act 2003 (Vic), authorised version 027 (in force from 1 July 2024), Victorian Legislation — sections 65 and 67 — Part 8 applies to retail premises in retail shopping centres (s 65); s 67 bars a landlord from divulging a tenant's turnover information except with consent, as aggregate centre figures, or in good faith and without identifying the tenant to a financier — section 05.

// QUESTIONS PEOPLE ASK

What is a good occupancy cost ratio for a retailer?: Each kind of shop carries a different share. A business with low gross margins, such as a supermarket, can afford only a small share of sales for occupancy; a high-margin specialty retailer can carry much more. A reader compares a store with others in the same category, in similar centres, and with its own past, and asks how much sales could fall before the store stops contributing. A ratio that has risen steadily matters more than any single year's level.
What costs are included in occupancy costs?: Usually base rent, any turnover rent, the outgoings or service charge the tenant pays for the building's running costs, and any marketing or promotion levy. In the UK, business rates are also a cost of occupying the shop. Definitions differ: the Shopping Centre Council of Australia's guidelines, for example, exclude other tenant costs and benefits, so a fit-out contribution from the landlord does not reduce the reported figure. A reader should check the definition behind any published ratio.
Why do shopping centre landlords collect tenants' sales?: Because a lease with turnover rent needs the figure to calculate the rent, and because sales show the landlord which tenants are trading well and which may struggle to renew. Collected across the centre, they also show which categories are growing and what rents the centre can sustain. Some laws limit what the landlord may do with them: Victoria's retail leases law, for example, restricts passing on individual tenants' turnover.
How does GST affect the occupancy cost ratio?: It depends on the convention used. Australian shopping centre reporting under the industry's guidelines divides occupancy costs excluding GST by sales including GST, which gives a lower ratio than dividing both excluding GST. A store with US$1.0m of sales before GST and US$185,000 of occupancy costs reports 16.8% on the first basis and 18.5% on the second. A lender comparing a centre's figures with a retailer's own should put them on the same basis first.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Workout and recoveries managerTakes the files that have gone wrong and works out how much the bank gets back, and how.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

SIGNAL OR NOISE · THE ECONOMY · COLLATERAL MARKETS

A loan is secured on a specialised cold-store warehouse. Similar warehouses in the region have taken two years to sell.

Signal or noise?

3 MORE ON THE ECONOMY · COLLATERAL MARKETS →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHOccupancy cost ratio What is a retailer's occupancy cost ratio, and what does it warn of?