You’re a business owner in New Zealand, and your company is growing. Your current space no longer meets your needs, so you’re considering a commercial build. It’s exciting, but also daunting - especially when it comes to one question: “Is this worth the investment?”
For many business owners and investors, this is where things get tricky. Calculating the return on investment (ROI) for a commercial build isn’t always straightforward. It’s not just about construction costs or the future value of the property—it’s about understanding how the build will impact your bottom line, improve efficiencies, and even shape your brand.
Whether you're thinking like a property investor or considering business growth opportunities, by the end of this article, you’ll have a clear idea of how to make sure your project stacks up.
- Yield and Market Comparison
- Operational Savings and Efficiency Gains
- Business Growth and Potential Opportunities
- Branding, Credibility, and Staff Retention
- Choosing the Right Method for Your Commercial Build Project
Yield and Market Comparison
The first and most traditional way to calculate ROI is by evaluating the yield or capitalisation rate. This involves comparing the expected rental income against the market value of the property. For example, if your new commercial building is worth NZ$5 million and generates a rental yield of 4-6%, you might be wondering whether that’s a competitive return in the current market.
A 4-6% yield may seem low compared to the potential return on their business operations. However, keep in mind that property investment offers more than immediate cash flow—it also brings long-term capital gains. As rents increase with the market over time, the yield improves. For example, a building yielding 5% today could eventually be sold at a 3-4% yield as the market evolves, translating into significant capital gains.
Here’s a simple formula for calculating yield:
Rental Yield (%) = (Annual Rental Income ÷ Property Value) x 100
Example: Annual Rent of $500,000 +GST ÷ Property Value of $10,000,000 = 5% Rental Yield
This method gives a quick snapshot of whether your investment will provide an acceptable return compared to similar properties on the market.
To understand how to calculate the Capitalisation rate (CAP Rate) or Yield Percentage, click here.
Operational Savings and Efficiency Gains
For business owners, a commercial build isn’t just about rental yields. Often, the new space allows them to improve operational efficiencies, which can lead to savings. These savings can come from a variety of areas, like better logistics, increased automation, or reduced reliance on third-party services. For example, a company might construct a larger facility that allows them to store their own stock rather than paying for third-party logistics (3PL). In this case, the ROI isn’t just about the rent or capital gains but about what the business can save by building
To calculate the ROI in terms of operational efficiency, consider the following formula:
ROI (%) = (Savings + Profitability Increase ÷ Cost of the Build) x 100
Let’s say the new build enables a business to save NZ$500,000 annually by cutting out 3PL costs, and the build cost NZ$3 million. The ROI would be 16.7% per year. This type of calculation is particularly useful in industries like logistics or manufacturing, where process improvements can have a significant impact on the bottom line.
Additionally, it’s worth considering the payback period, which shows how long it will take for the savings and profits to cover the cost of the build:
Payback Period = Cost of the Build ÷ Annual Savings/Profitability Increase
Using the same example, the payback period would be six years. This gives a clear picture of how long it will take to break even on the investment.
Business Growth and Potential Opportunities
A commercial build can also unlock new growth opportunities for your business. This is especially true if your existing space is limiting your ability to expand. By investing in a larger or more specialised facility, you might be able to increase your capacity and, in turn, your revenue.
For example, imagine your current facility is 1,000 square meters, and you’re turning over NZ$10 million annually. You decide to build a new facility that’s 50% larger at 1,500 square meters, allowing you to double your business to NZ$20 million per year. In this case, the ROI isn’t just about rental yield or operational savings—it’s about the increase in business turnover per square meter.
To calculate this, you can use the following formula:
Business Turnover per Square Meter = Annual Business Turnover ÷ Total Square Meters
In this example
Old Facility: NZ$10 million ÷ 1,000 sqm = NZ$10,000 per sq
New Facility: NZ$20 million ÷ 1,500 sqm = NZ$13,333 per sqm
This shows that not only does the business grow, but the value per square meter also increases significantly. Over time, this can lead to compounding growth and an even greater ROI as the business scales.
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Branding, Credibility, and Staff Retention
Sometimes the ROI of a commercial build goes beyond financials. A well-designed, modern facility can enhance your brand image, make you more attractive to clients, and even help retain and attract talented staff. These non-monetary benefits are harder to quantify but can have a significant impact on the overall success of your business.
For instance, a cutting-edge facility can signal growth and innovation to your customers, boosting your reputation in the market. This can help you secure new deals or break into new markets. Similarly, a well-designed workspace can improve staff morale and productivity. A comfortable, well-equipped environment can make your employees more engaged and less likely to leave for other opportunities.
While it’s difficult to assign a specific number to these benefits, consider the following questions when factoring in the broader ROI of your build
- What potential deals or partnerships could the new facility unlock
- How could the build impact your company’s perception as a leading player in the industry?
- Will the new space help you retain key staff or attract top talent
For example, companies like AdvanceQuip made the extra investment to install underfloor heating to their workshop to ensure they could retain and attract top mechanics and workshop staff.
Choosing the Right Method for Your Commercial Build Project
When calculating the ROI for a commercial build project in New Zealand, there’s no one-size-fits-all approach. The right method depends on your goals—whether you’re acting as a property investor, aiming to grow your business, or looking for operational efficiencies.
- If you’re focused on property investment, yield and market comparison provide a solid foundation for understanding your return
- If operational efficiency is key, calculating savings and payback periods can help determine how the build will improve profitability.
- For business owners looking to grow, consider the potential increase in turnover that a new facility could enable.
- And don’t forget the intangible benefits like enhanced brand image and staff retention, which can be just as valuable in the long run.
Ultimately, by using these different methods, you can make a more informed decision and ensure your commercial build project stacks up, both financially and strategically.
