Service Charge Benchmarking
Feasibility Study
Context Report
March 2013
Service charges: Context Report
Contents
1
EXECUTIVE SUMMARY ............................................................................................................... 1
2
INTRODUCTION .......................................................................................................................... 2
3
2.1
Background......................................................................................................................... 2
2.2
Who is backing this project? .............................................................................................. 3
2.3
Note on terminology .......................................................................................................... 3
ANALYSING THE SAMPLE............................................................................................................ 5
3.1
Sample size ......................................................................................................................... 5
3.2
Variability of service charges.............................................................................................. 5
3.3
The average building .......................................................................................................... 7
3.4
Expenditure by class ........................................................................................................... 8
3.5
The impact of size on service charges .............................................................................. 17
3.6
The impact of location on service charge ........................................................................ 18
4
THE MODEL EXPLAINED ........................................................................................................... 18
5
EMERGING ISSUES .................................................................................................................... 24
6
5.1
Rent versus service charge ............................................................................................... 24
5.2
Cost attribution ................................................................................................................ 25
5.3
Exceptional expenditure .................................................................................................. 26
5.4
Incidence of unused code categories ............................................................................... 27
Future of service charge benchmarking ................................................................................... 29
IPD | An MSCI Brand
Page i
Service charges: Context Report
1
EXECUTIVE SUMMARY
The RICS Service Charge Code recommends benchmarking to improve both transparency and
communication between landlord, tenant and managing agent. IPD’s vision for service charge
benchmarking is for independent cost analysis to be merged with service level analysis so that in
due course value for money can be established for individual commercial buildings.
The vision was tested in this Feasibility Study, which has widespread backing from the industry. It
covers 145 Central London offices, 70 shopping centres and 127 retail/shopping parks. The
overall aims of the Feasibility Study are to test the applicability of the reporting system as well as
to produce high quality analysis.
This report contains extensive analysis for each of the RICS cost categories for the selected
property types. The main feature of the analysis is the considerable variability of the results
which are difficult to explain to tenants. Participants in the feasibility study receive an individual
property report and a short summary for each type of property.
The feasibility study has tested regression models for each of the 22 cost categories for each
property type. These models have explained about half the variability in service charge outturns. Of the factors examined, the major drivers of service charge costs were size, operating
hours, and air-conditioning.
There are a number of conclusions for the industry as a whole:
1. The connection between rent and service charge needs to be explored further. At present the
connection between the two appears weak.
2. Property managers should ensure that all costs are attributed accurately to each cost
category. This is not always happening.
3. The definition of all cost definitions and especially that of exceptional expenditure needs
clarifying in the next edition of the RICS Service Charge Code.
4. Major questions need to be asked about the ability of the industry to maintain its building
stock given that forward funding is not generally used and the levels of expenditure on repair
are lower than we would expect.
5. Property managers need to consider further improvements to their information systems and
processes.
We believe that this feasibility study represents a major step forward in developing transparency.
The study has also identified how to make major improvements to the model to improve the
accuracy of predictions at individual property level, which augurs well for the future.
The sample size in this feasibility study was sufficient for the purposes of testing the model but in
due course the analysis needs to be applied to many more those commercial buildings. This
would have the effect of being able to increase the accuracy of prediction and to improve the
impact of benchmarking on the effective working of service charges.
This would lead to substantial benefits for tenants, landlords and managers.
IPD | An MSCI Brand
Page 1
Service charges: Context Report
2
INTRODUCTION
2.1 Background
The RICS Service Charge Code recommends benchmarking as a measure for improving
transparency and to improve communication between landlord, tenant and managing agent.
The vision for service charge benchmarking is for independent cost analysis (using the RICS
Service Charge Code of Accounts) to be merged with analysis and understanding of cost drivers
and service levels so that in due course value for money can be established for most types of
commercial property.
The ultimate benefits for the industry are to:
1. Demonstrate value for money and good practice in service charges with the backing of
independent analysis
2. Increase transparency within the industry in an area known to foster mistrust
3. Develop a basis of communication between tenants, managing agents and landlords with
fewer disputes and time savings
4. Support the generation of regular research reports on the market
The vision was tested in this Feasibility Study, which covers Central London offices, shopping
centres and retail/shopping parks. The overall aims of the Feasibility Study are to:
1. Test the applicability of the reporting system for individual property types and for
individual properties
2. Produce high quality analysis of service charges and check the quality/availability of data
for each property type
Two different types of report are being produced: one, context report, for the market as a whole
and one at property level. The reports are intended to inform landlords and tenants about the
relative cost exposure of their properties on as like-for-like basis as possible.
Context Report
Property Report
Overall trends and analysis
Communication tool with
tenants
Focus on cost drivers
Clear summary against
benchmark
Issued free of charge
Key differences: overall £,
costs/m2, %, cost
This Context Report summarises the results across the benchmark types. It covers:

Average benchmarks for each cost line in the Service Charge Code for each property and
benchmark type
IPD | An MSCI Brand
Page 2
Service charges: Context Report



Analysis of the major cost drivers of performance to include size, age, air-conditioning,
intensity of use etc.
The variability of results across property types
Examination of key issues, such as the significance of exceptional expenditure
The Property Reports will in due course be a key communication tool with the tenant. Within the
Feasibility Study, these reports contain analysis that compare for each category line in the Service
Charge Code (including for each class), showing:
1. Actual charge per square foot
2. Upper and lower cost per square metre difference from the prediction
3. total value of the cost difference from the prediction
2.2 Who is backing this project?
IPD is very grateful to the following organisations for backing the Feasibility Study:
 British Land
 Broadgate Estates
 Capital & Regional
 Capital Symonds
 Derwent London
 DTZ
 Grosvenor Fund Management
 GVA
 Hermes Fund Management
 Lambert Smith Hampton
 Land Securities
 MJ Mapp
In addition, we are also grateful for the widespread industry support we received from the British
Council of Shopping Centres, which helped to finance this study and the following representative
organisations endorsed this exercise:





British Council for Offices
British Retail Consortium
CoreNet Global
Property Managers Association
Royal Institution of Chartered Surveyors
2.3 Note on terminology
The concept of cost classes and cost categories comes from the RICS Service Charge Code, 2nd
Edition, April 2011. Each of the 22 cost categories is contained within one of the seven cost
classes. See www.rics.org/standards for further information.
In this document, reference to:
IPD | An MSCI Brand
Page 3
Service charges: Context Report



Offices refers to offices in central London.
Centres refers to shopping centres
Parks mean both retail and shopping (fashion) parks unless specifically signalled
otherwise.
IPD | An MSCI Brand
Page 4
Service charges: Context Report
3
ANALYSING THE SAMPLE
3.1 Sample size
Almost 350 properties were analysed in this Feasibility Study, amounting to 55 million square
feet.
Table 1
Mean of average £ per square foot, by property type
Properties Million sq ft Average sq ft
Central London Offices
Shopping Centres
Retail Parks
Shopping Parks
Total
145
12.3
85k
70
24.1
343k
110
3.9
131k
17
14.4
232k
342
54.7
159k
3.2 Variability of service charges
The overall spread of service charges is shown in Figure 1 below. Median service charges are
£8.80, £4.74, 81p and £1.66 for Central London offices, shopping centres, retail and shopping
parks respectively. A major feature of other publications on service charges (JLL with OSCAR and
the SCOR report by Property Solutions and others) is the variability of service charge results.
IPD | An MSCI Brand
Page 5
Service charges: Context Report
Figure 1
Quartile distribution for total service charge per sq ft
Quartile distribution for total service charge psf
£12.00
£10.77
£10.00
£8.48
£8.00
£7.32
£6.21
£6.00
£4.83
£3.80
£4.00
£2.00
£1.05
£0.60 £0.75
£1.36
£1.73
£2.12
£0.00
Offices
Shopping centres
Lower Quartile
Median
Retail parks
Shopping Parks
Upper Quartile
Figure 2 shows that the upper quartiles for total costs per square foot (per sq ft) are about 65%
higher for offices and shopping centres, whereas retail parks are more variable at 90%. The
following observations emerge:






These are high variations, although cost classes are nearly always less variable than their
component category costs.
There seems to be a strong suggestion that high costs are only passed through in one
category when it is lower in another to ensure that the overall service charge is not too
expensive. This suggestion is borne out by discussions with property managers.
Management fees typically display variability of 70% across all three categories
Utility costs show a wide variability of about 160%, similar across all property types. This
reflects a range of different building ages, purchasing power and specification within the
sample
Soft services have variability of about 120% for offices, 80% for shopping centres and
150% for retail parks
Hard services variability is also much lower for shopping centres (70%) than for offices
(100%) and retail parks (165%).
IPD | An MSCI Brand
Page 6
Service charges: Context Report
Mark-up of upper quartile over lower
Figure 2
Variability of results by selected cost category
Variability of results
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
-
Offices
Retail Parks
Shopping Centres
Shopping Parks
3.3 The average building
Table 2 below shows the mean of the costs per square foot for each cost category for each of the
four property types.
IPD | An MSCI Brand
Page 7
Service charges: Context Report
Table 2
Mean of average £ per square foot, by property type
Central London
Offices
Shopping Retail Parks Shopping Parks
Centres
Management
£.53
£1.27
£0.16
Management Fees
£0.68
£0.38
£0.08
Accounting Fees
£0.04
£0.02
£0.01
Site Management
£0.68
£0.84
£0.04
Health & Safety
£0.13
£0.04
£0.04
Utilities
£1.57
£0.47
£0.06
Electricity
£1.10
£0.37
£0.05
Gas
£0.31
£0.04
£0.00
Fuel Oil (Heating)
£0.02
£0.00
£Water
£0.14
£0.06
£0.00
Soft Services
£2.96
£2.51
£0.43
Security
£1.81
£0.97
£0.17
Cleaning & environmental
£1.15
£1.21
£0.25
Marketing & promotions
£0.00
£0.33
£0.00
Hard Services
£2.69
£0.91
£0.24
Mech. & Elect. Services
£1.95
£0.46
£0.05
Lift & Escalators
£0.28
£0.08
£0.00
Suspended Access
£0.02
£0.00
£0.00
Fabric Repairs
£0.44
£0.35
£0.19
Income
-£0.00
-£0.11
-£0.02
Interest
-£0.00
-£0.00
-£0.00
Commercialisation
£-£0.11
-£0.02
Insurance
£0.05
£0.06
£0.01
Engineering Insurance
£0.03
£0.01
£0.00
All risk Insurance Cover
£0.02
£0.05
£0.01
Sub-total
£8.81
£5.11
£0.88
Exceptional spend
£0.38
£0.21
£0.05
Major Works
£0.38
£0.21
£0.05
Forward funding
£0.00
£0.00
£0.00
Total
£9.18
£5.32
£0.93
Note: £0.00 indicates an actual amount less than 0.5p. £- indicates no recorded amount.
£0.37
£0.14
£0.00
£0.20
£0.02
£0.12
£0.10
£0.00
£0.00
£0.01
£0.99
£0.62
£0.35
£0.02
£0.18
£0.06
£0.00
£0.00
£0.12
-£0.03
-£0.00
-£0.03
£0.00
£0.00
£0.00
£1.63
£0.11
£0.11
£0.00
£1.74
3.4 Expenditure by class
The graphs overleaf shop the average expenditure on each class of service charge expenditure for
each of the property types.
IPD | An MSCI Brand
Page 8
Service charges: Context Report
Figure 3
Average class expenditure, by property type
£ per square foot
Average service charge make-up, Central London offices
£3.50
£3.00
£2.50
£2.00
£1.50
£1.00
£0.50
£-
£2.96
£1.53
£2.69
£1.57
£0.05
£0.38
£ per square foot
Average service charge make-up, shopping centres
£3.00
£2.50
£2.00
£1.50
£1.00
£0.50
£-£0.50
£2.51
£1.27
£0.91
£0.47
£0.06
£0.21
£0.01
£0.05
-£0.11
£ per square foot
Average service charge make-up, retail parks
£0.50
£0.40
£0.30
£0.20
£0.10
£-£0.10
£0.43
£0.24
£0.16
£0.06
-£0.02
£ per square foot
Average service charge make-up, shopping parks
£1.20
£1.00
£0.80
£0.60
£0.40
£0.20
£-£0.20
£0.99
£0.37
IPD | An MSCI Brand
£0.12
£0.18
£0.00
£0.11
-£0.03
Page 9
Service charges: Context Report
The cost composition of service charges at class level (excluding any income) is shown in Figure 4
below. Features of this chart include:






Management costs vary between 17% (offices) and 23% (centres)
Utilities costs are 17% for offices, 9% for centres and 7% for parks
Soft services are seen to be the biggest contributor for all property types and vary
between 32% (offices) and 56% (shopping parks)
Hard services vary from 10% (shopping parks) to 29% (offices)
Insurance is 1% for shopping centres and retail parks and does not feature for offices and
shopping parks
Exceptional expenditure is between 4% (offices and centres) and 6% (shopping parks)
Figure 4
Composition of service charge costs
Make up of service charge costs, by property type
100%
90%
80%
70%
Exceptional spend
60%
Insurance
Hard Services
50%
Soft Services
40%
Utilities
Management
30%
20%
10%
0%
CL offices
Shopping centres
Retail parks
Shopping parks
On the following six pages, Figures 5-7 contain further analysis of how service charges costs are
distributed across the sample under the following headings:
1. Management costs
2. Utility costs
3. Soft services costs
4. Hard services costs
5. Total costs (including insurance, income and exceptional expenditure.
Readers should note that we are particularly interested in the shape of the lines to see whether
there are any discontinuities. Generally, we are expecting a straight line rising from left to right
but we see in many of the charts a marked change to the slope where top quartile provision is
seen to be distinctly more costly.
IPD | An MSCI Brand
Page 10
Service charges: Context Report
Figure 5
Central London offices: service charge composition
Management cost in Central London offices

Main elements are
management fees and site
management resources
costs

Site management tends to
increase very sharply as
overall management costs
increase

Electricity the predominant
costs in utilities category
No sudden increase in any
one factor as overall
utilities costs rise
£3.50
£3.00
£ per square foot
£2.50
£2.00
£1.50
£1.00
£0.50
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
90%
Distibution of results %
Management Fees
Accounting Fees
Site Management
Health & Safety
Utilities cost in Central London offices
£3.00

£ per square foot
£2.50
£2.00
£1.50
£1.00
£0.50
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
90%
Distribution of results %
Electricity
Gas
Fuel Oil (heating)
Water

Soft services in Central London offices
£6.00

£5.00

£ per square foot
£4.00
£3.00
£2.00
Very little marketing
expenditure in offices
Security the major element
in Central London offices
Cleaning costs go up more
sharply as soft services
costs increase.
£1.00
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
90%
Distribution of results %
Security
IPD | An MSCI Brand
Cleaning & Environmental
Marketing & Promotions
Page 11
Service charges: Context Report

Hard services cost in Central London offices
£5.00
£4.50

£4.00
£ per square foot
£3.50
£3.00

£2.50
£2.00
£1.50

£1.00
M&E services the
predominant cost in
Central London offices
These rise slightly with
increases in overall costs
Fabric repairs rise sharply
with rises in overall costs
Lift costs rise steadily
£0.50
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
90%
Distribution of results
M&E Services
Lift etc
Suspended Access
Fabric Repairs

Total service charge in Central London offices
£16.00
£14.00

£ per square foot
£12.00
£10.00
£8.00

£6.00
£4.00
£2.00
£0.00
10%
20%
30%
40%
50%
60%
70%
Distribution of results %
Management
IPD | An MSCI Brand
Utilities
Soft services
Hard services
80%
90%
Most costs rise steadily as
overall service charges
increase
Soft and hard services have
the biggest spike for more
expensive properties
Other costs only come into
play at the 50% level.
These go up quite sharply
at the top end of the
range.
Other
Page 12
Service charges: Context Report
Figure 6
Shopping centres: service charge composition

Management cost in shopping centres
£2.50
£ per square foot
£2.00

£1.50
£1.00
£0.50

£0.00
10%
20%
30%
40%
50%
60%
70%
80%
90%
Site management
resources are the
predominant cost
in shopping centres
These costs rise
sharply for the top
20% of centres
Other costs go up
steadily.
Distribution of results %
Management Fees
Accounting Fees
Site Management Resources
Health, Safety & Environmental

Utilities cost in shopping centres
£1.20
£ per square foot
£1.00

£0.80
£0.60
£0.40

£0.20
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
90%
Distribution of results %
Electricity
Gas
Fuel Oil (heating)
Water

Soft services cost in shopping centres
£4.50
£4.00
£ per square foot
£3.50
£3.00

£2.50
£2.00
£1.50
£1.00

£0.50
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
Distribution of results %
Security
IPD | An MSCI Brand
Cleaning & Environmental
Electricity costs are
predominant in
this category
The costs rise
steadily as overall
utilities costs
increase
Gas and water
feature at the top
end of the range.
Marketing & Promotions
90%
Security and
cleaning are the
two major
elements
Both go up steadily
within shopping
centres
Marketing and
promotions start
from a low base
but go up sharply
with overall costs.
Page 13
Service charges: Context Report

Hard services cost in shopping centres
£2.00
£1.80
£ per square foot
£1.60
£1.40

£1.20
£1.00
£0.80
£0.60
£0.40
£0.20
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
90%
Distribution of results %
M&E services
Lifts etc
Suspended access
Fabric repairs

Total service charge in shopping centres
£10.00
£9.00

£ per square foot
£8.00
£7.00
£6.00
£5.00
£4.00
£3.00
£2.00

£1.00
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
Distribution of results %
Management
IPD | An MSCI Brand
Utilities
Soft services
M&E services and
fabric repairs are
the predominant
hard services cost
Both these and
lift/escalator spend
go up sharply as
overall hard
services costs
increase
Hard services
Other
90%
Soft services are
the major costs in
shopping centres
All costs go up
strongly as overall
service charges
increase
Other costs are
mainly major
works which
operate at the 50%
level and become
quite significant at
the top end.
Page 14
Service charges: Context Report
Figure 7
Retail parks: service charge composition
Management cost in retail parks
£0.35

£ per square foot
£0.30
£0.25
£0.20

£0.15
£0.10
£0.05
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
90%
Management fees
are the major
element in
management costs
All categories go up
quite sharply as
overall class costs
increase
Distribution of results %
Management Fees
Accounting Fees
Site Management
Health & Safety

Utilities cost in retail parks
£0.14
£ per square foot
£0.12
£0.10
£0.08

£0.06
£0.04
£0.02
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
90%
Electricity is to all
extents and
pruposes the only
utilities cost to
feature in this class
for retail parks
There is a sharp
increase in these
costs for the most
expensive 20%.
Distribution of results %
Electricity
Gas
Fuel Oil (heating)
Water

Soft services cost in retail parks
£0.90
£0.80

£ per square foot
£0.70
£0.60
£0.50
£0.40
£0.30

£0.20
£0.10
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
Distribution of results %
Security
IPD | An MSCI Brand
Cleaning & Environmental
90%
Cleaning is the
major cost in this
area
Both cleaning and
security go up
sharply as overall
class costs increase
Marketing and
promotions do not
feature
significantly
Marketing & Promotions
Page 15
Service charges: Context Report

Hard services cost in retail parks
£0.50
£0.45
£ per square foot
£0.40

£0.35
£0.30
£0.25
£0.20
£0.15
£0.10
£0.05
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
Fabric repairs are
the major category
under this class
Both fabric repairs
and M&E services
go up sharply as
overall costs rise,
the latter from a
low base
90%
Distribution of results %
M&E Services
Lifts etc
Suspended Access
Fabric Repairs

Total service charge in retail parks
£1.80
£1.60
£ per square foot
£1.40

£1.20
£1.00
£0.80
£0.60
£0.40
£0.20
£0.00
10%
20%
30%
40%
50%
60%
70%
80%
Distribution of results %
Management
IPD | An MSCI Brand
Utilities
Soft services
Hard services
90%
All classs costs go
up sharply as total
service charge
increases
Other costs (mainly
major works) are
still a small
element for the
top quartile parks
but do not feature
at the 50% level
Other
Page 16
Service charges: Context Report
3.5 The impact of size on service charges
One feature of the project is to take more account of the individual characteristics of the building
than has occurred in the research on service charges to date. Figure 8 below examines the extent
to which overall service charges for Central London offices are influenced by the size of the
building. It is immediately clear that the smaller offices attract much more variable results than
the larger ones over 70,000 sq feet. This appears to be due to a combination of diseconomies of
small scale combined with much greater variability in the availability or level of services (for
example in lifts, air-conditioning, reception etc).
Figure 8
Variability by size band, by property type
Shopping centre service charge, by size band
Central London offices, variability by size band
£12.00
£8.50
£11.00
£7.50
£ per sq ft
£ per sq ft
£10.00
£9.00
£8.00
£7.00
£6.50
£5.50
£4.50
£3.50
£6.00
£2.50
£5.00
0-20k sf
20k-40k sf
Lower Quartile
40k-70k sf
70k-150k sf
0-100ksf
150k sf +
100k-250ksf
Lower Quartile
Upper Quartile
250k-350ksf
350k-500ksf
500k sf +
Upper Quartile
Retail parks, variability by size band
£1.30
£1.20
£1.10
£ per sq ft
£1.00
£0.90
£0.80
£0.70
£0.60
£0.50
£0.40
0-50k sf
50k-90k sf
90k-136k sf
Lower Quartile
136k-208k sf
208k sf +
Upper Quartile
Shopping centres too are influenced by size with median £ per sq ft figures reducing from the
second size category onwards. Like offices, the spread of results tends to decline with size.
With retail parks, the spread is not so consistent. The largest parks display quite a high spread,
indicating a wider range of facilities provided, which are covered by the service charge.
IPD | An MSCI Brand
Page 17
Service charges: Context Report
3.6 The impact of location on service charge
Figure 9
Service charges, by property type and location
Shopping centre service charge, by broad region
£7.50
£12.00
£7.00
Service charge, £ per sq ft
Service charge,
£ per sq ft
Central London Office service charges, by market area
£13.00
£11.00
£10.00
£9.00
£8.00
£7.00
£6.00
£6.50
£6.00
£5.50
£5.00
£4.50
£4.00
£3.50
City
Lower Quartile
Mid-town
West End
South & East England
Upper Quartile
Lower Quartile
Rest of UK
Upper Quartile
Retail park service charges, by broad region
Service charge, £ per sq ft
£1.20
£1.10
£1.00
£0.90
£0.80
£0.70
£0.60
£0.50
£0.40
London
Southern and Eastern
England
Lower Quartile
4
Rest of UK
Upper Quartile
THE MODEL EXPLAINED
One of the main purposes of the Feasibility Study is to test the ability of the model to predict
overall service charges for individual properties. The model, as used in the Feasibility Study,
calculates a predicted value for each of the component 22 Cost Code categories using input data
(see below) for each building. The predicted overall value for each building is the sum of the
predictions for the individual categories.
The inputs tested are shown in Table 3 and Figure 10.
IPD | An MSCI Brand
Page 18
Service charges: Context Report
Table 3
Inputs used
Address
Comments and proposed changes
Used to categorise region/area
Floorspace
Typically, this is the net internal area on which the rent is charged.
However, a number of factors can cause this number to be adjusted.
Age of building
Decade of original construction date. This needs to be changed to take the
year of the last major refurbishment, and particularly the date on which
the mechanical and electrical equipment last received major attention.
Region/area
The IPD regional classification was used. This uses fairly tight geographical
definitions in London, especially in the centre but use broader definitions
elsewhere.
VAT election
The election to charge VAT should allow the 20% VAT element on some of
the expenditure in a non-elected-for-VAT building to be reclaimed.
Rental value
Rental value was seen to be a major driver of a quite a few of the cost
categories but could not be collected consistently for all the properties.
This needs to be remedied in 2013. ERV was not therefore included in the
final model.
Hours of operation
Hours of operation are found to be a significant factor. However, the
definitions need to be more precise, especially into determining the time
over which the M&E equipment is running. In retail, trading hours should
be selected.
Air-conditioning
This was a significant factor (see below). However, in talking over the
results with participants, the project will need to be more precise about
the precise nature of the air-conditioning.
Other utilities
Other utilities directly paid for within the service charge
All-risks insurance
All risks insurance premia directly paid for within the service charge
IPD | An MSCI Brand
Page 19
Service charges: Context Report
Figure 10
Main cost drivers examined
Floorspace
All-risks
insurance
Age of
building
Other
utilities
Region/area
S/C
£/psf
Airconditioning
VAT election
Hours of
operation
Rental value
Other factors, which we would want to test in 2013, will include:
 Number of entrances
 Lift/escalator provision
 Number of stories
 Existence of data centres
 Number of schedules
 Retail centre hierarchy and type
 Further detail where certain services are excluded from the service charge
 Building life-cycle indicators
 Ratio of common parts to rental floor area
 On-site management provision
How selected drivers affect cost out-turns
Table 4 below shows the impact of selected drivers on overall service charge out-turns1. Some of
these differences are marked. It should be borne in mind that there is not necessarily a causal
1
The overall predicted service charge is derived from forecasts for each service line, using the 22 cost
categories in the RICS Service Charge Code. Nevertheless, it is convenient to estimate the average impact
of each factor on the total service charge levied.
IPD | An MSCI Brand
Page 20
Service charges: Context Report
relationship between these factors and the service charge amount. For example, older buildings
are often more expensive to maintain for a given specification but prove to be less expensive in
our sample because, we assume, the base specification is lower. The range of factors examined
will have to be increased in the 2013 programme.
Table 4
The impact of selected factors on total service charges
Factor
Floorspace
Each 10%
increase in sq ft
reduces £ per sq
ft by about:
CL Offices
2%
Shopping Centres
1%
Retail Parks
2%
Age of building
Older buildings
can see typical
reductions from
modern building
of about:
20%
20%
45%
Region/area
Range / reduction
possible
25% outside core
CL area
35% compared
with London
+/-15% around
the norm
VAT election
Effect of VAT
election
30% cheaper
Not relevant
Not relevant
Hours of
operation
Compared with
15-18 hours
+/- 10%
+/- 10%
+/- 10%
Air-conditioning
Provided within
service charge
60% where
supplied to
demise
10% higher where
provided to
common parts
Not relevant
Other utilities
Provided within
service charge
Unclear
10% higher
Not relevant
All-risks
insurance
Provided within
service charge
20% higher
10% higher
Not relevant
The relative contributions of the most important three or four factors for each property type for
each of the category models developed for this Project are shown in Table 5. The table
summarises the number of times each factor is shown to be making a high relative contribution to
the out-turn for each service line.
For Central London Offices, almost half of the cost categories analysed have the size of the
building as the main influence on costs, showing economies of scale. For example, this applies to
IPD | An MSCI Brand
Page 21
Service charges: Context Report
accounting fees but not to cleaning provision. Air-conditioning is also a very significant factor,
followed by insurance and core operating hours.
For Shopping Centres, size affects fewer of the category-out-turns but is still the most important
factor of the ones examined. Operating hours, insurance and air-conditioning also feature in the
top four, although in a slightly different order.
Retail Parks are more straight-forward with operating hours, size and shopping park status being
the main factors which feature in the service line models.
Table 5
Analysis of most important factors affecting category costs
All cost
headings
Central London Offices
Service charge area
A/C through SC to demise
All-risks insurance included in SC
Core operating hours
Shopping Centres
Service charge area
Core operating hours
All-risks insurance included in SC
A/C through SC to common parts
Retail/shopping parks
Core operating hours
Service charge area
Shopping Park adjustment
Top
2nd
factor factor
count count
3rd
factor
count
Top 3
factor
count
18
18
18
18
7
5
2
2
1
1
4
2
4
5
1
2
12
11
7
6
18
18
18
18
4
4
3
3
4
3
4
2
2
2
2
1
10
9
9
6
15
15
15
6
4
3
4
2
5
3
4
0
13
10
8
The strength of a relationship in a regression equation is normally tested through an R2 ratio.
Table 6 below shows these ratios for each cost category for each property type. Those that are
35% and above are considered strong for a model that is attempting to explain a ratio, particularly
as the variability in those ratios can be large from one property to another.
Those with an R2 less than 25% are weak models with greater errors in their predictions and are
not so reliable. We were not able to model those factors (principally in retail and shopping parks)
without a stated R2. In 2013 most effort will need to be paid to the cost service lines with the
lowest R2.
It should be noted that the overall R2 typically rises to over 90% when the costs are modelled on
the overall bill rather than the amount per square foot.
IPD | An MSCI Brand
Page 22
Service charges: Context Report
Table 6
Total R2 for individual cost categories
Cost category
Cost Classes - Grand Total
Management Fees
Accounting Fees
Site Management Resources
Health, Safety & Environmental
Electricity
Gas
Water
Security
Cleaning & Environmental
Marketing & Promotions
Mechanical & Electrical
Services
Lift & Escalators
Suspended Access Equipment
Fabric Repairs & Maintenance
Interest
Income from
Commercialisation
Engineering Insurance
All Risks Insurance Cover
Major Works
IPD | An MSCI Brand
Central London
office
41%
52%
87%
55%
67%
36%
31%
32%
47%
42%
61%
22%
30%
48%
24%
43%
68%
33%
Retail
park
28%
33%
89%
56%
49%
29%
Shopping
park
33%
34%
88%
45%
49%
28%
16%
39%
87%
17%
53%
83%
90%
90%
37%
91%
23%
79%
37%
80%
22%
72%
Shopping
Centre
49%
46%
95%
61%
61%
50%
76%
53%
83%
55%
57%
58%
48%
36%
69%
43%
28%
73%
Page 23
Service charges: Context Report
5
EMERGING ISSUES
5.1 Rent versus service charge
In reviewing the results, there are a number of issues that appear to be raised by the data
collected. One of these issues is the variability of results already noted. This variability is difficult
to explain to tenants. With a developing awareness of service charge issues, one might expect
that buildings with high service charges would increasingly cause tenants to lower their rental
bids.
Figure 11 explores the apparent lack of connection between ERV and service charge per sq ft. It
shows that the ratio between them for Central London offices tends to vary between 10% and
50%, averaging at about 25%.
Put another way, for all the rental values in a £5 band around £40 per sq ft from £37.50 to £42.50,
the service charge variation per sq ft is £7.70. If the 25% norm applied, the service charge
variation might be expected to be £1.25 per sq ft.
Figure 11
Service charges per sq ft versus rental value per sq ft, Central London offices
£90
£80
£70
R² = 0.0707
ERV psf
£60
£50
£40
£30
£20
£10
££-
£5.00
£10.00
£15.00
£20.00
£25.00
Service charge psf
IPD | An MSCI Brand
Page 24
Service charges: Context Report
5.2 Cost attribution
If transparency, as envisaged by the RICS Service Charge Code, is to materialise in the market, the
evidence collected in this feasibility study suggests that a much greater effort needs to be made
to make all the individual component costs more consistent when producing service charge
certificates. When asked to explain higher than expected results, we have heard the following
explanations as set out in Table 7.
Table 7 Cost attribution
Reasons for cost variability
A supplier provides more than one service
and it is not possible to divide the costs
accurately. This can result in both costs being
wrong and misleading to the tenant and
other users of the service charge certificate.
Comment
All suppliers should be required to provide a
breakdown of all costs to the accepted cost
categories in the RICS Code.
Site management costs are high
Sometimes site management costs are high
because of a deliberately higher allocation of
resource to service the building in the form of a
slightly bigger on-site team (or one with higher
skills).
It may be more appropriate to put site
management costs under the heading of “soft
services” since the type of services provided
normally relate to a higher level of service to the
tenant customer. Indeed, there are management
costs within most component cost categories.
Some exceptional costs seem to be
attributed to year-on-year costs
Some year-on-year costs seem to more properly
belong within the category of Major Works. It
would be helpful if the rules could be made
clearer.
This applies particularly to the two major Hard
Service costs: mechanical & electrical repairs and
fabric repairs).
IPD | An MSCI Brand
Page 25
Service charges: Context Report
5.3 Exceptional expenditure
Exceptional expenditure can be a very contentious subject as it is incurred in an unpredictable
way from the tenant’s point of view, unless flagged in advance by the landlord/managing agent.
Perhaps for that reason, only about half of the total number of office and shopping centre service
charges analysed featured any exceptional expenditure at all. For retail and shopping parks that
percentage falls to 39%.
As a percentage of the total, about 15% of offices and parks and 5% of shopping centres had
exceptional expenditure above 15% of the total service charge.
Table 8 Incidence of exceptional expenditure (EE)
Property type
% nil
% not nil
Ave £ per sq ft
where not nil
Central London Offices
49%
51%
£1.09
Approx % of sample
where EE <15% of
total
85%
Shopping Centres
52%
48%
£0.50
95%
Retail/shopping parks
61%
39%
£0.19
85%
Figure 12 summarises the % of the service charge represented by exceptional expenditure across
the range of properties in the sample as a whole.
Figure 12
Exceptional expenditure, by property type
There are two categories within Exceptional Expenditure: major works and forward funding. As
noted in the next section, only 4% of all the service charges analysed involved any form of
forward-funding. Our sample of landlords increasingly appear to be paying for major works
themselves and then subsequently charging for these over a period of time through the major
works element.
IPD | An MSCI Brand
Page 26
Service charges: Context Report
5.4 Incidence of unused code categories
It is interesting to observe the percentage of the properties analysed with nil entries for certain
cost categories. The incidence of zero costs has been taken into account in the model but does
need to be thought through more generally. Difficulties will arise where zero costs are the results
of incorrect cost attribution, since the corollary of a wrong zero is that the costs elsewhere have
been stated too high.
The proportion of zero entries is surprisingly high. Perhaps of most interest are the following:
 Only 67% of service charges have an explicit accounting fee
 Marketing and promotions is not included as such in 11% of shopping centres
 Interest is only credited for 42% of offices and for about 15% of retail properties
 Some insurance is paid for about 55% of offices and parks but 71% of shopping centres
 Only 4% of these service charges involved any form of forward-funding
IPD | An MSCI Brand
Page 27
Service charges: Context Report
Table 9
% of non-zero cost classes/categories
Cost class/category
CL offices Centres Parks Total
Management
100%
100% 100% 100%
Management Fees
100%
100%
99% 100%
Accounting Fees
74%
63%
61% 67%
Site Management Resources
96%
100%
81% 91%
Health, Safety & Environmental
76%
94%
99% 88%
Utilities
Electricity
Gas
Fuel Oil (Heating)
Water
97%
94%
78%
4%
89%
97%
96%
70%
1%
90%
94%
93%
6%
1%
36%
96%
94%
50%
2%
70%
Soft Services
Security
Cleaning & Environmental
Marketing & Promotions
99%
92%
98%
6%
100%
94%
100%
89%
97%
68%
95%
6%
98%
84%
97%
23%
Hard Services
Mechanical & Electrical Services
Lift & Escalators
Suspended Access Equipment
Fabric Repairs & Maintenance
100%
99%
93%
41%
97%
99%
97%
84%
39%
96%
Income
Interest
Income from Commercialisation
43%
42%
1%
79%
13%
77%
40%
16%
30%
49%
26%
27%
Insurance
Engineering Insurance
All Risks Insurance Cover
Terrorism Insurance
57%
55%
25%
1%
71%
54%
57%
10%
56%
3%
55%
2%
59%
36%
43%
3%
Exceptional Expenditure
Major Works
Forward Funding
49%
48%
6%
47%
44%
6%
30%
29%
1%
42%
40%
4%
IPD | An MSCI Brand
100% 100%
90% 95%
4% 58%
3% 26%
99% 98%
Page 28
Service charges: Context Report
6
Future of service charge benchmarking
This feasibility study has highlighted many key issues for the future of service charges in the UK.
Perhaps top of these is the inherent variability of results that are seen in the analysis. This
variability makes it very difficult for the industry to explain service charge out-turns clearly.
Transparency is therefore required to reassure tenants, owners and managers that the service
charges being levied are fair and appropriate in the context both of the building and the market.
We believe that this feasibility study represents a major step forward in developing this
transparency. However, there is room for much more progress in developing this work.
In an effort to limit the data demands on data providers, the Steering Group decided to limit the
amount of data being collected for each building. This limitation needs to be relaxed in future
work as about a dozen extra data items need to be collected, as presented in Section 4 (see page
20). This extra data should increase the explanatory power of the model to increase from about
50% towards about 70%.
The sample size in this feasibility study was sufficient for the purposes of testing the model but in
due course this analysis needs to be applied to many more of those commercial buildings with
service charges. This would have the effect of being able to increase:
1. The accuracy of the analysis
2. The impact of the benchmarking on the effective working of service charges
3. The benefits to tenants, landlords and managers
IPD will investigate the appetite of the industry to continue down this road.
IPD | An MSCI Brand
Page 29
Service charges: Context Report
Global enquiries
+44.20.7336.9200
www.ipd.com
@IPDNews
Netherlands
+31.88.328.22.00
www.ipd.com/netherlands
[email protected]
Australia
+61.2.9248.1900
www.ipd.com/australia
[email protected]
Portugal
+351.22.208.50.09
www.ipd.com/portugal
[email protected]
Canada
+1.416.520.7250
www.ipd.com/canada
[email protected]
South Africa
+27.11.656.2115
www.ipd.com/southafrica
[email protected]
France
+33.1.58.05.36.90
www.ipd.com/france
[email protected]
Spain
+34.917.610.271
www.ipd.com/spain
[email protected]
Germany
+49.611.3344.990
www.ipd.com/germany
[email protected]
Sweden
+46.8.400.252.30
www.ipd.com/nordic
[email protected]
Hong Kong
+85.2.8175.4388
www.ipd.com/asia
[email protected]
UK & Ireland
+44.20.7336.4783
www.ipd.com/uk
[email protected]
Japan
+81.3.5211.1455
www.ipd.com/japan
[email protected]
USA
+1.312.646.6240
www.ipd.com/usa
[email protected]
IPD | An MSCI Brand
Page 30