Auckland has the highest industrial land and building costs and the lowest development margins in Australasia.

The figures are stark. The high cost of land and building in Auckland is leaving developers with a skinny 8% margin, while developers in Australia's biggest cities are reaping 21-30%.

New research from Savills Australasian industrial composition table shows Auckland has the highest development input costs of any of the main cities, compensated only by low capitalisation rates and relatively high rents.

Paddy Callesen , Managing Director Savills New Zealand, says a recent survey by Savills Research indicates Auckland has the highest industrial input costs of any of the Australasian Capital Cities.

The National Industrial Composition table indicates component costs of land, building and rent in the makeup of the end value of a property, where essentially the land and building costs are the input costs and the rent is the lease over the property which produces a margin over input costs.

The table is based on a 10,000sq m warehouse sitting on a 20,000sq m site with a seven year lease to a tenant and shows the value of the property in different cities, taking into account the land and building costs and rent.

Please click here to view the table.

"Whilst capitalised rent indicates higher margins in some of the Australian cities in the graph below, what is unsaid is the level of inducement or incentive given to a tenant to sign a lease. Cities having the largest margin over input costs traditionally have higher inducements.

"Melbourne for example is currently offering lease inducements of 20% to 30%, meaning a tenant signing a 10-year lease can expect two to three years rent free. By comparison, Auckland landlords are offering inducements of just one month for every two years or a five month rent holiday, or a 4% incentive on a 10-year lease," said Mr Callesen.

Auckland has a relatively low risk leasing profile as vacancy rates are close to zero but speculative development has all but stopped.

"Before Auckland's tightening land supply and rampant building costs, a 20% margin was acceptable for developers. Speculative building was normal, but it is now virtually non-existent apart from developers who have land they bought some time ago."

"The skinny development margins make it too difficult to go ahead with projects that don't have pre-commitment from tenants."

He says there is not much that can be done about building costs, but a big increase in council-zoned industrial land supply would put the brake on rising land prices and make speculative development attractive again because the margins would outweigh the risks involved.

"With the surge in residential development, Auckland needs to provide a greater amount of industrial land zoned in tandem with housing supply, otherwise businesses will not come to Auckland and will be lost to other Australian cities."

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