28/05/2009

Gordons retail update – Value for money in service charges

As rents continue to slide retailers have had to factor in the extent to which service charges have in some Shopping Centres become a much bigger proportion of their occupational overheads.

Retail Tenants have always been keen to keep an eye on service charge levels but in these more careful times it is more important that ever.  Unlike rent, which will be fixed until the next review and cannot usually go down, service charge levels can be attacked if Leases include appropriate Tenant protection.

However, acting singly a Tenant can find that challenging a service charge can be a complex and time consuming process which either diverts resources from a retailer’s core business or needs additional resource.

In recognition of this the property industry moved 2 years ago to a voluntary code of good practice for service charges, the RICS Code of Practice on Service Charges.  Although the code has gained wide acceptance its focus is on good practice rather than achieving economies.

As ever commercial reality is what will really drive change.  If service charge levels for a shopping centre are so high that occupiers are discouraged Landlords have to do something about it.  In recognition of this a number of major Landlords and national retailers have been working on a plan to reduce service charges.  A 10 point plan has been produced which sets out guidelines as to how efficiencies and economies can be achieved.  In many respects these guidelines reflect good practice and many Landlords, especially owner occupiers, will not find the guidance novel.  Matters covered by the plan include open dialogue with retailers, re-tendering of service contracts, multitasking centre staff, optimising joint marketing opportunities which look like common sense.  What is impressive however, is the detail in the plan and the results which have been achieved at the centres where the scheme has been trialled.  The scheme was piloted at 2 of the busiest shopping centres in Yorkshire, Meadowhall in Sheffield and the White Rose in Leeds.

The pilot scheme showed cuts of 20% at Meadowhall and 13% at White Rose.  The momentum behind these retailer led initiatives means Landlords who spend Tenants’ money will need to consider those twin Yorkshire values of common sense and value for money.