The EPRA cost ratio shows how much of the rent is absorbed by running the portfolio, and the version without vacancy costs shows how much of that is the platform itself.
The EPRA cost ratio is administrative and operating costs, after a defined set of exclusions, divided by gross rental income less ground rent and any service charge element inside the rent. On an illustrative property company with 8.8m of EPRA costs against 48.9m of adjusted rental income, it is 18.0 per cent including direct vacancy costs and 13.7 per cent excluding them. The 4.3 point gap is the cost of empty space, and it is the part an asset manager can move fastest.
Worked in full in The Real Estate Asset Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The European Public Real Estate Association introduced the cost ratio so that investors could compare how much of a landlord's rent is absorbed by running the portfolio and the platform. It is reported twice: once with the direct costs of vacant space (empty rates, irrecoverable service charge on voids, insurance and security of empty units) and once without them. The first tells you what the portfolio costs as it stands. The second isolates the efficiency of the platform. The two only make sense together.
| Line | Amount |
|---|---|
| Administrative expenses | 4.2 |
| Property operating expenses | 5.1 |
| Net service charge costs (irrecoverable) | 1.8 |
| Share of joint venture expenses | 0.4 |
| Cost lines before adjustments | 11.5 |
| Management fees received from JV partners | 0.5 |
| Estimated profit element in those fees | 0.2 |
| Investment property depreciation, inside the costs | 0.3 |
| Ground rent, inside property operating expenses | 0.6 |
| Service charge recovered through inclusive rents, not separately invoiced | 1.5 |
| Direct vacancy costs, inside the lines above | 2.1 |
| Gross rental income per IFRS | 48.0 |
| Share of JV gross rental income less ground rent | 3.0 |
All figures are fictional. The inclusive-rent line is the trap in most portfolios: some tenants pay one figure that covers both rent and service charge, so the landlord's service costs sit in its expenses and the matching recovery sits in its rent.
1. Start from the cost lines: 4.2 + 5.1 + 1.8 + 0.4 = 11.5.
2. Deduct management fees received, less their profit element: 0.5 − 0.2 = 0.3. These fees recover overhead already counted in administrative expenses.
3. Exclude depreciation 0.3, ground rent 0.6 and the 1.5 of service costs recovered through inclusive rents: 2.4 in all.
4. EPRA costs including direct vacancy costs = 11.5 − 0.3 − 2.4 = 8.8. Excluding them: 8.8 − 2.1 = 6.7.
5. Denominator: gross rental income 48.0, less ground rent 0.6 (giving 47.4), less the 1.5 service charge element of rent, plus the 3.0 JV share = 48.9.
6. EPRA cost ratio = 8.8 / 48.9 = 18.0 per cent including vacancy costs, 6.7 / 48.9 = 13.7 per cent excluding them.
In Excel, keep each adjustment on its own row with its sign, then =SUM(costs)/SUM(rent), so the reconciliation to the income statement stays visible.
Every adjustment has a twin. The inclusive service charge comes out of the numerator and the denominator; ground rent comes out of both; the joint venture share goes into both. A ratio that adjusts one side and not the other is no longer the EPRA measure.
| Change | EPRA costs | Rent base | Incl. vacancy | Excl. vacancy |
|---|---|---|---|---|
| Base | 8.8 | 48.9 | 18.0% | 13.7% |
| Let the vacant space: 4.0 of rent in, 1.2 of vacancy cost out | 7.6 | 52.9 | 14.4% | 12.7% |
| Cut administrative expenses by 1.0 | 7.8 | 48.9 | 16.0% | 11.7% |
| Sell a let asset: 6.0 of rent and 0.3 of costs out | 8.5 | 42.9 | 19.8% | 14.9% |
Letting the empty space moves the headline ratio by 3.6 points, more than a 1.0m cut in overhead, because it attacks both sides at once: rent rises and vacancy cost falls to 0.9. The ratio excluding vacancy barely notices the letting, which is exactly why both are reported. Selling a fully let asset does the opposite: the platform's costs stay, the rent base shrinks, and the ratio worsens to 19.8 per cent. A disposal programme without a matching cut in overhead shows up here within a year.
The ratio rewards scale and occupancy, not only thrift. When comparing two portfolios, read the vacancy-inclusive figure for the business as it is, and the exclusive figure for how lean the platform runs.
A monthly asset dashboard and a rent roll that separates let from vacant space are in the free workbook for this case. For the rent side of the same vacancy, see how to calculate the EPRA vacancy rate, and for what a single void costs in rent and fees, what a lease expiry costs.
The first keeps the direct costs of empty space, such as empty rates and irrecoverable service charge on voids, in the numerator; the second removes them, while the rent denominator stays the same. On the illustrative company 2.1m of vacancy costs separate the two: 18.0 per cent against 13.7 per cent.
Because it is the cost of holding a leasehold interest rather than a cost of running the portfolio, so EPRA removes it from both the costs and the rental income. Leaving the 0.6m of ground rent and 0.3m of depreciation in the costs of the illustrative company lifts the ratio from 18.0 to 19.8 per cent.
Yes, on the vacancy-inclusive measure it is usually the strongest lever. In the illustration, letting space with 4.0m of rent that carried 1.2m of vacancy costs takes the ratio from 18.0 to 14.4 per cent, while cutting overhead by 1.0m only reaches 16.0. The ratio excluding vacancy moves from 13.7 to 12.7.
This article is one calculation from The Real Estate Asset Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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