Service charges are a necessary part of multi-occupancy locations, but assessing value for money for the services included can be difficult. A new report from Property Solutions looks at the issues in the retail.

Benchmarking has become commonplace in a world where data is increasingly accessible and reliable. For FMs, this is an important mechanism for assessing supply chain effectiveness.

SCOR for Retail, now in its seventh year, is produced from data provided to Property Solutions by an array of contributing parties, including directly from several commercial landlords. This provides an unbiased and representative dataset, this year incorporating service charge information from 70 landlords and 39 managing parties within the commercial retail sector. An academic overview of the research is provided by Dr Andrew Holt, Professor of Accounting at MSU Denver.  Evaluating both service charge costs and compliance with the RICS Code of Practice, this is a unique document serving as a useful reference for FMs, property managers and landlords alike.

This year’s report highlights the increase in charges for shopping centres.  In London, a rise of 3.6% brings charges to an average of £6.87 per sq ft,  and for the rest of the UK a lower 1.4% increase represents an average of £4.93 per sq ft. Comparisons take into account whether the properties are covered or part/uncovered.  The survey revealed that covered shopping centres incur a 50% higher service charge than their part/uncovered counterparts.

Below – a sample table from SCOR 2017: Analysis of service charge costs across all shopping centres.

As far as the services themselves are concerned, soft services amount to just less than half the total expenditure at 44.26%, a slight increase year on year from 43.49% recorded in the previous year’s report. Hard services by comparison amount to 13.7% of the total costs. Cleaning and environmental services increased by an average of 0.64%, whilst costs for security, M&E , lifts and escalator maintenance and fabric repairs and maintenance all reduced.

The detailed cost benchmarking of 2016 service charge certificates and budgets (used to produce the 2017 figures) includes:

  • Segmentation of shopping centre data based on total area to generate appropriate benchmarks for locations of different sizes.  Although results show that the larger London shopping centres have higher pro-rata charges than smaller ones, the difference across the rest of the UK is minimal.
  • Trend analysis of service charges over the last three years highlight that costs have increased by approximately 10% over this period.
  • The “total cost of management”, made up of management fees and site management resources, accounts for over 20% of the total service charge.  (The RICS Code of Practice requires transparency and a management structure where costs are clearly identified and explained.  It is recommended that these are included in explanatory notes in the service charge documents.)

Each year SCOR highlights a “pocket of best practice” as far as compliance with the RICS Code is concerned. This year it is reserved for those from the 71 certificates analysed that lead the way in presenting in a clear and transparent manner the details of the apportionment basis upon which the service charge is allocated to shopping centre occupiers.  In fact, one of the contributing landlords/managing agents achieved full compliance scores: a commendable result.

2018 will see the advent of the Code as a RICS Professional Statement.  Any property owner will need to ensure that service charge accounting practices measure up against the RICS Code as it will be a mandatory requirement for RICS professionals. A significant upturn in compliance with the principles set out in the Code is expected for the reports for 2018/19 as a result.

Based on the analysis and findings the report concludes with the following recommendations:

  • Good practice dictates that occupiers should make sure they interrogate the costs in any service charge budget and certificate, cross-referencing with the terms of the lease.
  • It is predicted that costs will rise by more than inflation at least in the short-term due to the continued increases in the National (and London) Living Wage. This is something that retailers should consider for their budgets.
  • Some practitioners in the corporate office service charge sector present service charge accounts in the form of an end-of-year balance sheet a method that could be adopted for the retail sector.

Download the full SCOR report.

 

Click here to view the full article: The service charge challenge

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