A number of our clients are looking at service charge as a proportion of rent. In my early working days, I recall people viewing 10% as reasonable proportion (where a service charge was payable). That is now rising and we are seeing that figure move up to 25% in many cases and above 50% in a significant minority.
Where rents are depressed, the servicing requirements remain the same, so to an extent this is understandable especially in secondary schemes. However, the trend goes way beyond that as a means of justification and it is even becoming a consideration in mid-market schemes, where deals are being done at lower rents but the service charge continues to increase. In some cases, it includes major works that some might argue ‘prop-up’ a scheme in a difficult time or services are enhanced to present a better environment.
Whatever way you look at this, if service charge is to become a bigger slice of the property overhead, it must be subject to continued and increased scrutiny with greater meaningful consultation with occupiers. For occupiers taking new leases, completing short term extensions and re-gears, controls on service charge may become almost as important as headline rent. Those controls might include caps, index linking, limiting the service charge to a fixed proportion of rent.