Evaluating Service Charge Costs:  Are You Paying a Fair Price?

You may well be paying a service charge at many of your properties, but how do you know whether the amounts you are paying are reasonable? You can compare costs within your own portfolio, but how do they compare with the wider market?

Leveraging the Assure Index for Accurate Benchmarking

This is where the Assure Index, published annually by Assure Consulting, can help.  We publish three editions covering Offices, Retail & Shopping Parks, and Shopping Centres, but this article will focus on the office sector.

2024 Office Sector Service Charge Data:  A Snapshot

The 2024 edition of the index for Offices, which was published on the 1st March, provides cost per square foot (psf) data for four tiers of property, based on total service charge cost.  For example, Tier 1, where the annual service charge budget is £2,237,000 and above, has a median cost psf of £15.71. Tier 4, where costs range between £122,000 and £531,000, has a median of £6.00 psf.

Breaking Down Service Charge Costs:  What the Data Reveals

Service charge costs are broken down into categories, with most landlords and managing agents adopting the standard classifications published by the RICS.  The category breakdown for Tier 1 properties reveals the following:  

• 53% of total costs fall under ‘people’  based expenditure categories:  Site Management, Security, Cleaning, and M&E Services.
• Despite recent reductions, utility costs represent 21% of the budget.
• Major works costs are almost 11% of the budget.

Identifying High-Cost Areas:  When Benchmarking Reveals Discrepancies

So, the Index tells you that the median cost for security is £2.30 psf, but you are paying £3.00 psf.  Are you being overcharged?  Not necessarily.  There are many factors that determine the level of services that a landlord provides, and a typical commercial lease gives a landlord significant control when it comes to determining this.

Inflation and Its Impact on Service Charge Costs

An important issue that is linked to benchmarking is the impact of inflation on service charge costs.  Inflation started to climb sharply from a base of 1.4% (RPI) at the end of 2020 to 7% in 2021 and peaking at 13.9% in 2022.  Service charge budget costs have followed suit.

The Challenge of Budget Adjustments During Economic Fluctuations

An issue that often arises during times of economic uncertainty is the ‘lag’ in adjusting budgets to account for improving economic conditions.  The budget-setting process will usually commence some months before the start of the service charge year, the landlord and the managing agent who advise them will often be cautious when it comes to catering for factors such as inflation reducing.

Advocating for a Dynamic Approach to Budget Management

There is a tendency to be cautious (or pessimistic depending on your point of view), often resulting in budgets that will comfortably recover more than 100% of the service charge costs.  Tenants are expected to pay their share of this on-account and then wait until four months after year-end, often longer, to receive any credits that are due.

Looking Ahead:  How to Manage Service Charge Costs More Effectively

There needs to be a more dynamic approach taken within the industry to setting budgets and adjusting them to account for underspends. During the budget-setting process, changing economic conditions and forecasts need to be accounted for, right up to the point that a budget is signed off by the landlord.

Join Us for Further Insights and Strategies

To explore further and learn how Assure Consulting can help you as occupiers manage your property costs more effectively, we welcome you to join us at our upcoming seminars in Manchester and London this October.  Register here to secure your place!

To find out how Assure can help with reducing your occupancy costs, download one of our free eBooks or fill out the contact form below