OSCAR 2007 > Retail

Introduction

The accurate measurement and monitoring of costs set out in the OSCAR report is an essential tool for the Chartered Surveyor in developing effective property management strategies and measuring management performance.

The RICS has worked closely with Jones Lang LaSalle to ensure that the new industry Service Charge cost categories are compatible with those used in OSCAR. The highly respected OSCAR work is a considerable contribution towards our objective of more consistency and transparency within the property management sector.

Christopher Edwards
Chair, RICS Service Charge Group
Chair, RICS International Commercial Property Faculty

Jones Lang LaSalle's Retail OSCAR continues to be the largest survey of shopping centre service charge information in the UK. The significant, representative sample of shopping centres which contribute to this report allows the reader to examine current trends and comparisons across type, size and location of each of the RICS approved heads of expenditure. Levels of service charge are the subject of constant debate between landlords, agents and occupiers of all shopping centres as all parties try to balance the obligations to (amongst other things) keep centres in good repair, improve customer service, adhere to environmental agendas and raise the standard of service delivery whilst all the time controlling costs.

104 shopping centres totalling 36,199,374 sq ft with a combined service charge spend of £148,168,257 were included in Retail OSCAR 2007. Of these 104 contributors 68 contributed to last year's report and we have 36 new contributors.

With the gradual adoption of the new RICS service charge cost classes there have been some anomalies between the ways in which expenditure is categorized by different owners and agents.

It is therefore recommended that the reader should take care when making like for like comparisons with historic data as some amendments to the raw data received for the 2007 report were necessary to bring it into line with the new RICS service charge code cost classes.

Background

There are two methods to calculate the 'average service charge' - the first method is to use the overall average of all the respondent's figures. This can however result in skewing of data due to over representation in certain categories. In order to remove the risk of skewed data the 'average service charge' in this report is calculated using the second method which involves taking the overall average figure for each category and then calculating the average of these figures. We consider this method a far more accurate representation of service charge costs across the spectrum. It should also ensure the average figures are not unduly affected by any variances across the sample from year to year.

Shopping centres across the UK vary significantly in terms of construction, age, staffing levels, amounts of common space, levels of security, number of lifts and escalators etc. All these variables must be considered when applying Retail OSCAR indices to individual properties.

This year's principal findings

  • The average service charge by type (including exceptional expenditure) has increased over the past 12 months from £4.04 per sq ft to £4.45 per sq ft, an increase of 10%. Average service charge by type (excluding exceptional expenditure) has increased from £4.02 per sq ft to £4.33 per sq ft, an increase of 7%. By way of a comparison the Retail Price Index increased by 4.4% over the same period and the IPD Shopping Centre Rents increased by 1.9%.
  • Of the 68 centres which were included in both the 2006 and 2007 reports 75% reported no increase in total service charge expenditure, while 3% have shown increases in line with RPI and the remaining 22% have reported year on year increases in excess of RPI.
  • The average date of construction of the 66 centres which specified their dates is 1984. As the centres in this report are on average over 20 years old, large items of exceptional expenditure on periodic refurbishment works are common place.
  • 68 centres reported the previous year's figures: 51 showed a reduction or nil increase, five reported an increase of up to 5%, five showed increases between 5% and 10% while the remaining seven showed increases in excess of 10%.
  • The greatest proportion of service charge expenditure is once again labour intensive activities such as cleaning and security which come under the heading of Soft Services. The combined figure of 45.73% of total expenditure, while slightly lower than last year, remains consistent with figures from the past five years.
  • Larger centres continue to benefit from economies of scale across all cost classes.
  • For the tenth consecutive year Region 1 (London and the South East) was the most expensive region. We suspect this is down to cost of living across the regions.

104 shopping centres totalling 36,199,374 sq ft with a combined service charge spend of £148,168,257 were included in Retail OSCAR 2007. Of these 104 contributors 68 contributed to last year's report and we have 36 new contributors.

  • Costs in Region 3 have increased by 27.22%, this increase is being driven by increased management and exceptional expenditure costs.
  • Management costs have increased to an average of £1.10 per sq ft compared to £0.98 per sq ft in 2006. We suspect that this increase is linked to changes in the RICS service charge cost classes which have meant that Management now also includes Health & Safety and Environmental management costs. Other possible explanations for this increase are increased staffing and office running costs.
  • The cost of Utilities has once again risen rapidly over the past 12 months. While the increases are not as high as the gains reported in the 2006 Retail OSCAR, they are certainly a reflection of a volatile energy market. The continued drive to lower carbon emissions in theory should have steadied or decreased the amount of electricity consumed in shopping centres, therefore it becomes evident that the increase in utility costs is a direct result of higher unit prices.
  • Cleaning costs have steadied after the rapid increase in costs in 2006. This figure goes against forecasts of rising cleaning costs as a result of the increase in the minimum wage in October 2006. The further rise of the minimum wage to £5.52 an hour in October 2007 and the expansion in statutory holiday entitlement from 20 to 28 days is likely to see these costs rise next year.
  • Marketing and Promotional expenditure has decreased both in terms of a rate per square foot and as a percentage of overall expenditure.
  • Hard Services expenditure has decreased for the second year in a row. We believe this is a result of the new RICS service charge cost class 'Exceptional Expenditure' which would previously have been reported under M&E and/or Building Repairs.
  • Insurance costs have increased marginally on last year as the insurance market corrects after a period of softening.
  • Exceptional Expenditure costs have increased significantly on last year. In conjunction with a number of very large items of exceptional expenditure in this years figures we believe that as owners and their agents become more familiar with the RICS service charge cost classes - expenditure of this kind is being stripped out of previous categories. Other possible reasons for increasing expenditure under this category is the fact that this years sample size includes a greater proportion or large airconditioned centres which are on average over 20 years old and are beginning to incur large sums as plant and machinery reaches the end of its economic life and requires replacement.
  • Income generated across the centres has increased from an average of £0.09 per sq ft in 2006 to £0.12 per sq ft in 2007. We consider this is most likely being driven by changes in the RICS code of practice, placing an emphasis on interest from service charge accounts being credited to the service charge. Another explanation could be revenues generated through increased recycling.