Service Charge Seminar 2019 “ Over the last three years we have seen an increase in service charges of 20% and these continued increases are simply not acceptable, particularly in the absence of strenuous efforts by landlords to work collaboratively with us to reduce these costs ”, John Lewis Statement as reported by the BBC
Talk to us about exercising control over your lease expenses………. • Service Charges – Management for Occupiers • Insurance – Check & Challenge • Tenant Recovery & Service Charge Management • Lease Expense Management • Lease Expense Auditing • Building Consultancy
Todays Contributions… • Isabel Owen, Director of Assure - Our Data & Some Current Issues • Lee Mason, Managing Director of Assure – Why did we commission this research? • Professor Andrew Holt & David Barrass – The UK’s Top 60 - Research Findings • Lee Mason, Managing Director of Assure – Challenges and What Next? • Questions & Answers • Drinks Reception
Our Data – Powered by Verivi • Our in-house developed Database – software engineers constantly refining and improving; • Access to huge resource of information; • Bespoke Reporting and Research; • Assure Index
The Assure Index • A quarterly updated review of trends in Service Charges budgets; • Measures changes across four main occupier sectors over the last 12 month period Budgets issued up to July 2020 compared to the last budget issued
The Assure Index
Our Data – Powered by Verivi • Service Charge Caps can offer certainty …. • Index linked, RPI/CPI (collar/cap?), overall total cap or £ per sqft; • Review of clients lease terms found : - • Overall Cap – 16% • Marketing Cap – 11% • Management Fees Cap – 40% • Assure can advice on benchmark costs .
Our Data – Powered by Verivi • RICS Code Mandatory Requirement – ‘ any service charge that has been raised incorrectly should be adjusted to reflect the error without undue delay’. • Track progress of dispute resolution ; • Easy to predict that the higher sums take longer to resolve, BUT they aren’t always complicated issues; • Even simple factual errors <£5,000 take on average over 4 months to correct.
Voids/Landlord Cap Shortfalls – a recent example • When we first received this Budget, we thought ‘what good news’! This Landlord must really be listening to their occupiers…
Voids/Landlord Cap Shortfalls – a recent example • We even took to social media to share the occasion! • But there were doubters out there….
Voids/Landlord Cap Shortfalls – a recent example • Four clients in this scheme = 13.5% of the occupiers; 1 x closed and vacating 1 x short term licence • On closer inspection of our client lease terms : - 1 x capped at a low level 1 x all inclusive rent…… • 23% of the Scheme is vacant, so the Landlord is the biggest occupier by far (next biggest is 9.75%);
Voids/Landlord Cap Shortfalls – a recent example • There was a real, active interest being shown in reducing costs; • BUT what consideration was given to the occupiers open and trading and still requiring a decent level of services??; • Watch out for re-allocations and re- apportionments based on ‘use’ and a real cut back in services, which may damage trade....
Why did we Commission this Research? Lee Mason, Managing Director Assure Consulting If you can’t measure, you can’t manage It’s Clear and Accurate ….and on time
What’s Happening to Service Costs? • The Assure Index is showing that Service Charge Growth is beginning to fall into line with Inflation (RPI is currently 2.6% and CPI is 1.7%) having sat above it for some time, especially in the larger schemes. • Across the UK’s Top 60, increases have exceeded inflation – why? • Perhaps we can identify the main contributors. • It’s not as simple as that…….
Your Major Work spend This is where it seems to be a series of round We looked more closely numbers adding up to and there were errors but £900,000, can we have some all goes wrong! the final number was detail? correct and it was underspent - here’s some detail • Flawed Benchmarking The breakdown includes Service Contract Overheads of • Can’t measure, can’t manage £162,244 – please explain The ‘Overhead’ is apportioned throughout • the Budget based on the Lack of Transparency % of the budget within the relevant cost centre • Management Fee Caps Breached So, what is the total ‘Overhead’ and what does it relate to? £453,230 and it covers We felt the need to take a closer look…. Central Mgmt, Office Space, Shared Services AP, AR, Credit Control Should this form part of the Management Fee? The Management Fee is charged separately but I acknowledge your view
Dr. Andrew Holt David Barrass Retail Service Charges Professor of Accounting DMB Consultancy aholt7@msudenver.edu david.barrass@me.com 2019 Research Initiative 303 641 8308 Project Report – Oct 2019
• Based on Industry Service Charge data – powered by Assure “ Verivi ” Top 60 National Shopping Centers by cost – Certificates & Budgets • Supplemented by sample lease data Assure • Conducted by Professor Andrew Holt, MSU Denver & David Barrass BSc Hons, ACMI 2019 Retail • Timescale – Undertaken 2 nd to 4 th Q 2019 • Results 8 th October 2019 – Assure Industry Seminar @ RICS Service Charge • Objective Outcomes: Cost metrics – principle drivers, trends, areas for action Initiative Compliance status Examples of best practice – areas of excellence?? Benchmarking – costs & compliance, ongoing reporting Conclusions & Action Plan – Clients, Assure, Industry
Service Char arge Do Documents Received & Analysed Status as St as at t 30 30 April il 20 2019 19 Calendar Year to Top 60 Centre 31 st December 2016 2017 2018 Data Actuals 60 56* 19 Acquisition Budgets 60 60 60 Metrics * 58 as at 30 th June 2019
• Total annual budget cost - £426.5 million per annum • Total retail area – 54.3 million SqFt • National geographic spread • Unit service charge costs - £7.85/SqFt Average Top 60 Centre • Main 2018 cost lines: Service Charge Cleaning/Refuse £96.6m per annum Management & Site Resources £86.0m per annum Data Metrics M&E/Repairs £80.0m per annum Security £69.5m per annum Marketing £46.2m per annum 2018 Budget Landlords Contribution (£20.7m) Major works £40.2m per annum Utilities £35.8m per annum Income and interest credited (£10.6m) per annum • Provision for auditing - £308.9k total - £5.1k per Centre!!
Impact of Centre Size on Service Charge Costs £/SqFt 16 Variability in 14 Service Charge (£/SqFt) 12 Overall Service 10 Charge £/SqFt 8 Costs Merits 6 4 Further 2 Understanding 0 0 1,000,000 2,000,000 3,000,000 Centre Size SqFt
UK Top 60 Shopping Centres 3 Year Average Service Charge Cost Trends (£/SqFt Underlyin ing Upward Pressure 9.00 on on Unit it Cos osts: Average Service Charge (£/SqFt0 8.50 8.00 Repairs & Renewals – Extension of 7.50 Centre Age 7.00 * 2018 – 19 Actuals Wages - Increases in UK Living Wage of 60 in Sample 6.50 Financial Reporting – Extension of 6.00 Accrual Accounting 2016 2017 2018 Budget Actual
Aging Stock of Major UK Shopping Growth in UK Shopping Centres Centres 60,000,000 50,000,000 Cumulative Centre Area (SqFt) Current Average Age = 29.4 Years 40,000,000 30,000,000 20,000,000 10,000,000 0 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Year of Opening
Impact of Centre Age on Service Charge Costs £/SqFt 16.00 14.00 But 12.00 2018 Service CXharge {£/SqFt} No Clear 10.00 Impact on 8.00 Overall 6.00 £/SqFt Costs? 4.00 2.00 0.00 0 10 20 30 40 50 60 70 Centre Age {Years}
Current Plans For Major Works Where Disclosed £43million Cumulative in 2019 4,000,000 Evidence of 3,500,000 Annual Centre Expenditure. (£) Ongoing 3,000,000 2,500,000 Expenditure on 2,000,000 1,500,000 Major Works 1,000,000 500,000 0 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 Annual Service Charge Budget {£}
Marketing is a Clear Strategic Gross 2018 Marketing Spend (£) Versus Shopping Centre Annual Service Charge Budget (£M) Priority 8,000,000 …But 7,000,000 6,000,000 Unexplained 5,000,000 4,000,000 Variability in 3,000,000 Spend?? 2,000,000 1,000,000 0 0 5 10 15 20 25 30 35 Note: 49 Centres - Excludes Marketing Millions Spend in Tenant Associations Annual Service Charge Budget (£M)
• Further work needed on Cost Leader “Beacons” to reach valid conclusions • No clear relationship – Unit Costs with Size or Age • Little evidence of cost innovation through time Findings So Far • Variable Marketing spend & impact – extend scope Costs, to include Tenants Association spend? Benchmarks • Further cost research would be beneficial – relationship with service delivery Beacons {major service lines} • Objective - evidence based service charge cost priorities
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