UK service charge increases – where can occupiers save now and where could additional costs bring added value?
August 24, 2022
Service charge costs are rising, with increases even outstripping rent rises for some occupiers. From an analysis of Avison Young’s service charge portfolio covering properties across the retail, office and office park, mixed-used, 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 2021 or early 2022, prior to most recent events - including rising interest rates and the war in Ukraine – which are now having a direct impact on costs.
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 leisure site we review, the increase in costs for electricity has been largely offset by reduced usage thanks to the implementation of LED lighting.
2) Marketing: identify pounds and efforts spent driving traffic to your space
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, with a drive to encourage visitors and workers back into physical sites – and, particularly for retail and leisure, rebuilding public confidence in accessing spaces.
Avison Young is seeing rising demand for public events as recovery progresses, which shows the confidence our clients have is increasing – often this is linked to marketing campaigns that serve to position the building, area or space to attract people back.
While occupiers can benefit directly from these initiatives, it is worth reviewing what difference marketing activities or events have made on your space. Are you part of a wider strategy or in control of your own, tailored approach? Knowing where money is being spent can ensure occupiers get the best value.
3) Staff: assess true needs against expenditures
Staff costs have seen an 8% increase overall, partly driven by an increase in the national living wage. 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 buildings, sometimes these increases fall in concierge fees. These types of roles and expenditures have risen significantly, with roles experiencing over 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 professional establishment that feels 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.
4) Extraordinary expenditure: be aware of major add-on projects that could impact your rates
Another significant cost increase has been regarding major works – covering repairs or renewals to a building’s exterior and communal areas. In many cases, works have been delayed over the past two years to keep costs low over COVID. Retail and Leisure Parks particularly saw an increase in works during the first half of 2022, as landlords sought to undertake works which have been deferred.
While they only make up around 5% of increased costs on average, the cost per building can be considerable. We’re seeing an average of £200k per property for major works. With cost of labour and materials on the rise too, this will impact further on any planned works.
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.
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 increase 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 landscape, and your pocketbook.
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 spend and keep costs down.
William Frostis an Associate Director, Service Charge Consultancy, Occupier Solutions based in our Leeds office.