As service charge budgets are set for 2023, occupiers and landlords with vacancy can expect significant operational cost increases across their real estate portfolios. Property Forum talked to Ryan Wray MRICS, Principal at Avison Young Czech Republic to understand what you can do to make savings and get better value from your budget.
Service charge costs are rising, with increases even outstripping rent rises for some occupiers. From an analysis of Avison Young’s European service charge portfolio covering properties across the retail, office, mixed-use, leisure and health sectors, we are seeing a 6.7% rise in service charges from H1 2021 to H1 2022. There are variations across different property types, with retail and leisure experiencing larger increases on average (16%) than offices because of increased major works, which include large-scale repairs or renewal to the exterior and communal elements of buildings.
While this may seem lower than figures reported across media outlets, it is worth remembering that most budgets have been set in early 2022, prior to most recent events - including rising interest rates and the current spike in energy prices.
What is driving service charge increases?
Major works delayed during COVID and increasing utility prices make up a large proportion of rising costs, but there are other areas to watch out for and no one size fits all solutions. That’s why at Avison Young, we work with clients across various sectors and have data that enables us to benchmark costs, which in turn informs how we advise on the best solutions for each individual property.
Each type of occupier can look at their unique service charges and potentially make reductions. Cost mitigation is important, and where extra money must be spent, landlords and occupiers should communicate openly with each other to ensure that it is spent in the best and most economic manner.
Where could the best opportunities for reduction lie for your property or portfolio?
With rapidly changing wider economic considerations, it can be daunting to determine where to start. Here, we share a few areas where hidden costs can lie and what can be done to address them.
1) Utilities: battling the rising cost of electricity, gas, and more
Perhaps unsurprisingly, a rise in electricity prices (we are seeing an average increase of 33% overall) and gas prices (we are seeing an average increase of 42% overall) marks the most significant budgetary percentage increase for occupiers so far this year. While all sectors have seen spiralling costs, the largest increases for electricity have been in retail and leisure, where bills are rising by 41% on average. At the same time, offices have suffered an average 60% increase in gas costs.
Many managing agents have planned for and pre-agreed to set prices over a period of time which has temporarily reduced the impact – however this only delays the inevitable.
To mitigate costs, we are seeing landlords installing energy-saving initiatives such as LED lighting or PIR sensors to reduce usage. Seemingly small and simple changes can have a profound benefit. At one property we reviewed, the increase in costs for electricity has been largely offset by reduced usage thanks to the implementation of LED lighting. Simple and effective.
Speak to your landlord or their agent and find out what energy efficiency initiatives are planned and why they’re deemed necessary. While this could save money, it also helps to reduce carbon emissions. Consider partnering with a firm, like Avison Young, which can provide advice and guidance on measures to ensure your building isn’t left behind in the green energy drive. We provide energy audits, BMS reviews, ESG Gap Analysis, and most importantly, simple and coherent step plans to reduce your consumption and allow for more efficient energy usage management today and in the future.
2) Integrated Facility Management Audit: so many services are tendered independently, within the premises of one property and even across multiple property portfolios held in single ownership…but why?
Landlords and occupiers alike can benefit easily by taking a birds-eye view of all their service providers, particularly on the facility side where incremental contractors have historically been tendered and awarded separately. Over recent years we have seen a consolidation of service providers within the Facility Management domain, but few clients have taken advantage of this shift.
When a single contract appears to be of low-cost relative to others, Real Estate Managers often overlook it to focus on the bigger picture. This is understandable. However, if there is an opportunity to consolidate the provider of multiple minor cost services the combined value and the resulting combined savings can be significant.
Instruct a team like Avison Young, who has in-house Technical Facility and Property Management Specialists, to conduct a review of your FM contracts to determine opportunities for savings. We can independently manage and consolidate those contracts and oversee the handover and implementation to new providers. The result is a streamlined contractual relationship with your service providers, fewer points of contact, better aligned KPIs and ultimately less time and costs for the landlord and the occupier.
3) Marketing: identify cash and efforts being spent driving traffic to your space and question if you are benefitting from this
Within retail centres, marketing costs in service charges have increased by 11% overall. This is largely driven by marketing ramping up as we collectively look to return to pre-COVID levels of footfall, but equally, in offices, there are major drives to encourage workers back into physical sites.
Avison Young is seeing rising demand for public events – often this is linked to marketing campaigns that serve to position the building, area or space in a forum where the landlord wants to be seen.
While occupiers can benefit directly from these initiatives, it is worth reviewing what difference these marketing activities or events are having on your space and your productivity. Are you contributing to a wider marketing strategy or in control of your own, tailored approach? Knowing where money is being spent can ensure occupiers get the best value. From a landlord’s perspective, it is best to keep your existing occupiers happy and in situ. The risks and costs associated with occupier churn are high in comparison.
4) Staff: assess true needs against expenditures
Staff costs have seen an 8% increase overall, driven by sustained wage inflation and low unemployment rates. This is especially the case for office buildings, where costs have risen almost 20%. Delayed recruitment drives in the last two years are also contributing to increases as well as costs attributed to specialized roles and offerings.
Within office building operations, these increases typically fall in reception, concierge and security personnel fees. These types of roles and expenditures have risen significantly, with these experiencing above-average wage inflation due to staff shortages.
Talk to your landlord or their agents to make sure that the staffing levels provided are not more than what is needed, while still maintaining the level of quality, health & safety and professionalism that is appropriate to all key stakeholders. It also pays to make sure your landlord is re-tendering contracts regularly to ensure all costs represent value for money. If you are a landlord of multiple properties, then economies of scale a certainly available through effective tendering and clever management of personnel resources.
5) Extraordinary expenditure: be aware of major add-on projects that arise from the previous postponement rather than current needs.
Another significant cost increase has been regarding major works – covering repairs or upgrades to a building’s exterior and communal areas. In many cases, works have been delayed over the past two years to keep costs low through COVID. Today we see an increase in works planned during the first half of 2022, as landlords seek to undertake works which have been deferred. But other factors have played a major role in inspiring new works throughout 2022; for example, the understanding of Landlords to become more environmentally and socially friendly has truly taken hold in 2022, partly driven by the current energy crisis. Secondly, the need to attract tenants, and for occupiers to attract staff has driven demand for modern, multi-functional office premises, offering a broader array of services to clients. The pressure has pushed landlords to execute wider refurbishment plans than in previous years.
At Avison Young, we encourage a cost-benefit review of all new expenditures. It is not good enough to say “it was already approved and postponed so we have to do it now”. Nor should we accept that any initiative that claims to be “green” or another that claims to be “value-added” simply is so. We are fully supportive of green initiatives, but the green benefit must outweigh the carbon and financial cost, otherwise, this is a process of green-washing. Placing solar panels on a roof of course can have a benefit however that benefit is dependent upon the size of the roof and the property consumption. For example, photovoltaic panels may reduce your consumption by 5% whereas an agreed energy usage policy which includes reducing your thermostat by just 1% could reduce your usage by 10%+. The latter solution is effectively free and has zero carbon footprint, only benefits.
Take a step back and ask: Does the action justify the expenditure? What action is the most beneficial? Do you have the expenditure today to complete that action? If not, can you make a sensible fund-raising plan to meet the cost and execute a sensible long-term beneficial action, rather than “plaster over the cracks”? If you are not sure, consult an independent expert to ensure you are aware of all the options available and you can make an informed decision which is best for all stakeholders.
As an occupier, make sure you understand the works that are planned. Objectively assess if works included in the service charge are needed and make sure they are fully recoverable under the terms of the lease. Landlords should be openly communicating with tenants in relation to upcoming major works and the costs involved. All extraordinary costs should have a solid economic and social business case.
With service charges on the rise, it’s more important than ever to ensure costs represent value for money. Utilities and staff costs have seen significant increases due to current events, and together with many landlords now seeking to press ahead with major works and improvements delayed by COVID, occupiers are faced with a perfect storm of issues impacting the commercial landscape, and your opex.
It is important to remember that costs can be queried, and often mutually beneficial solutions can be found which can result in a reduction in service charges. Communication and transparency between landlord and occupier is key to identifying opportunities to mitigate excess spending and keep costs down.
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