Firms should review office service charges to ensure value, report urges

6 August 2015

Office occupiers should check that their service charges offer value for money, according to a report.

According to the Service Charge Operating Report (SCOR) for Offices 2015 by Property Solutions (UK), occupiers should look into what they are paying and make sure that the costs are in line with the lease in place and that they offer value-for-money. The study was based on an analysis of service charge documents supplied by occupiers of large multi-let offices owned and managed by multiple entities.

It found that overall, the total service charge cost per square foot has increased since 2012, which it said reflected the growth of the economy. Charges only rose by 2.5 per cent in the median quartile of service charge levels, but by 10 per cent and 25 per cent in the upper and lower quartiles respectively.

London properties incurred higher costs than those outside the capital, which is not completely explained by higher accommodation and salary costs, the report said. For example, management fees are 50 per cent higher at £0.69 per sq ft, and site management resources, 62 per cent more, at £0.47 per sq ft. Higher rates for mechanical and electrical services (142 per cent) and electricity (224 per cent) could be partly explained as all the London properties in the dataset were air-conditioned.

The report said: “In summary, although we expect rates to be higher in the capital in comparison to the regions, we would not expect them to be so marked on a purely commercial basis. It seems that businesses are paying a premium simply for having a London postcode.”

The study also examined the levels of compliance on services charges with the RICS Code of Practice since 2010. It found while there were high levels of annual compliance in terms of certificates providing a clear apportionment basis for occupiers, the results for many of the other accounting metrics prescribed by the Code were mixed. While the disclosure of accounting principles and policies, for example, whether the accounts were prepared on a cash or accruals basis, improved significantly during 2010-2014, this information was still only disclosed in 34 per cent of certificates this year.

The report found that the quality and consistency of financial reporting practices for commercial service charges was generally poor. It said: “Full compliance with the Code’s accounting requirements in the office sector appears some way off and, given that the RICS emphasises the Code as having the status of a guidance note, this raises the question of whether voluntary adoption works, even with the added weight of the legal protection it offers against negligence claims.”

The report concluded with a raft of recommendations including:

• Occupiers should review service charge budgets and certificates in detail, especially when the costs incurred are higher than the industry average.

• Managing parties should pay more attention to overall accounting transparency.

• Managing parties should improve the consistency of the accounting sign-off and certification process.

• Accountants should engage with other property professionals in validating compliance of costs with leases and service contracts.

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