In an ever-evolving economic landscape, the ability to anticipate future costs is fundamental for occupiers.  The Assure team are already guiding clients through the process of forecasting for the year 2024, and there are going to be a multitude of factors influencing service charge costs in the coming year.

What are going to be the main factors influencing next years’ service charge expenditure?

Inflation is now falling and expected to continue falling in 2024 to an average of 3.4%, this will ease some of the cost-of-living pressures for households, but due to the Bank of England increasing interest rates and the impact on mortgages etc, disposable income will not start rising for a while yet.  Wages have stagnated over the last 15 years but are now predicted to rise by more than inflation, with the National Living Wage likely to increase by 6.5% in 2024 and research by WTW indicating that employers are budgeting for average salary increases of more than 4%.   

Underlying wage inflation coupled with labour supply in the most needed professional and technical activities remaining tight, means in those sectors, pay is being considerably enhanced.  Cost headings that are reliant on labour, such as cleaning, security, and M&E are therefore going to continue to face cost pressure increases.

Major works that were postponed in 2020/21 continue to filter into the new budgets.  As works were put on hold, repairs have become more urgent, more substantial, and consequently more expensive.  Tender prices are still increasing by more than inflation at 9.6% to Q2 2023 (according to Building magazine data July 2023) and borrowing for forward funding will be more expensive than in the last 15 years due to interest rates.

Utility prices are expected to fall slightly in 2024, but not to pre-2022 levels, and if contracts were fixed in late 2022 then the benefit might not be realised until post 2024.  Greater cost increases will also be coming in 2025 as it is projected that gas prices will surge by 35% and impact contract pricing for subsequent years.  Higher utility costs are here to stay well beyond 2030, according to Cornwall Insights.

We’ve previously updated you on the impact of MEES and Green leases on service charges.  Costs associated with these requirements and initiatives will increasingly feature as Landlords find ways to meet their net zero and sustainability requirements and enhance their ESG status. Whilst improvements in energy performance will contribute to a more sustainable future, it will also add another layer of complexity to forecasting service charge expenditure.

In retail, there continues to be fierce competition for every £1 that consumers spend – Landlords and occupiers want their scheme to attract the highest local footfall, which will mean being smarter, cleaner, better serviced and with a better mix of tenant than the scheme down the road.  That all costs more. 

It is consequently an uncertain outlook for service charge costs in 2024 and beyond.  Costs increases will likely vary widely, but at higher levels than in pre-pandemic years for the time being.  Budgets have historically broadly followed inflation so 2025 should see a return to more predictable levels.   For now, Landlords will have to strike a balance between increases in utility costs and labour costs, and the level of maintenance or improvement that the occupiers can withstand.  All at a time when consumer spending is increasingly stretched in a competitive retail market, and with the backdrop of an unstable economic outlook and ongoing environmental challenges.

For guidance on forecasting service charges in 2024 and to access our benchmarking data, complete the form below: