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Shops Under Pressure

13 April 2010

Leading retail property professionals debate the impact of the recession on the management of retail property and the issues around finding and retaining innovative and effective service suppliers in a such a price conscious environment. Jane Fenwick reports

THE UK’S RETAIL SECTOR IS A barometer for the economy so when worse than expected retail sales figures for January were announced, the pound wobbled hitting a nine month low against the US$ and there was talk of a double dip recession. The rise in VAT back to 17.5 per cent after 13 months at a lower rate probably also contributed to a reluctance to spend. Not surprising therefore that retail property owners and managing agents are examining operational costs in detail, and looking for ways to contain service charges to tenants.
Sensing this climate, Incentive FM, who won the FM contract operate the Covent Garden Estate last year for a five year term, hosted a debate last month to highlight key issues in the retail sector. A cross section of senior retail property management professionals examined what was impacting most on the sector and its FM suppliers now and in the future. The high street through to out of town shopping centres operates the spectrum of FM activity and models of delivery. Victoria Bradley, General Manager Covent Garden London and Incentive’s ‘woman on the ground’ has within her scope of responsibilities the Covent Garden market structures dating back to the 17th century, as well as 42 properties in surrounding streets occupied by well know high street brands and a mix of office and residential occupiers.
Bradley’s role ranges from licencing the street entertainers through the specturm of FM services. Her key concern is the health & safety of more than 45 million visitors a year visitors to a busy location whose charm is its unevenly cobbled streets and 24 hour life style.
The key concerns of the property professionals in the debate were, however, how to get value for money from their FM service providers while maintaining a high standard of facilities and delivering a service charge as low as possible to attract and retain the hard-pressed retailers.
John Prestwich, Head of Retail Asset Management at Cushman & Wakefield observed that, “There is immense pressure to keep the service charge low and in some cases this is being done by postponing work that needs to be done to keep the charge artificially low. Incoming tenants are getting wise to this and are asking for specific areas of work to be excluded from their charges.”
“The only way that further reductions can be made in many cases is by cutting out necessary maintenance which is very risky,” warned service charge consultant, John Gray. “For example, the lack of a planned maintenance programme for escalators can shorten the life of the equipment by many years. This is just storing up cost and problems, but in some cases it is necessary as retailers are struggling to pay the charges.”
“We need to remember,” said Paul Lancaster, General Manager Lakeside Shopping Centre, “that the service charge is only one element of the cost and you might get better rents if you have a lower service charge.”
Finding best value has often meant retendering contracts frequently which in turn does not allow the service provider the time and opportunity to develop relationships with clients, or be innovative to improve its services.
Andrew Thomson, UK Operations Director at Hammerson said, “Five years ago there was a lot of churn in our sector and land agents were regularly inheriting new sites and suppliers. There was little or no incentive to change because you knew that before long they would all move on again. Nowadays we hold on to sites much longer so the issue of retendering and benchmarking is much more key. If a supplier believes that they will be ‘thrown out’ at the end of their three-year contract, how likely are they to invest in the operation and continually innovate? It is certainly not desirable to constantly ‘churn’ suppliers. I think if we work closely with them on an open book basis and the contract term has been successful then there is a strong case for market testing rather than retendering."
Catherine Lambert, Head of Shopping Centre Management at Jones Lang Lasalle, said, “There have been some major changes in the past couple of years in how we approach this. We are now looking at contract terms on a three year plus two year basis, which means the contract will roll over after the initial three-year term for a further two years renewal if both parties are happy. This means we have had to also be more sophisticated about measurement and KPIs.”However, she explained, “We have no option but to put these services out to tender because we have to show best value – our retailers expect it.”
“It’s important to ask the right questions,” argued Gray. “It’s about giving the supplier the freedom to respond and add value. For example, a Service Centre Manager might tell a supplier how may cleaners he wants rather than asking how the ‘expert’ would propose to clean the premises.”
The debate turned to consider how service providers can be rewarded for good performance. Incentive’s Martin Reed said “We sometimes look at a piecemeal risk and reward options whereby if the supplier hits KPIs for a number of months this gets mirrored in a contract extension.” He explained this process can be strong incentive for continuous improvement as it avoids the wasteful retendering process.
The debate considered whether a ‘serviced office concept’ could work in the UK’s retail sector? Service providers could offer an all-in service to retailers and property managers alike similar to a model that is common in the USA. Prestwich revealed that some service suppliers had approached him to sell their services to retailers. The reward the landlord is by way of a share of the profit. He said, “Whilst the ethical principle might be questioned, it is also typical for retailers to have national contracts which they are reluctant to break.”
Lambert felt that the US conditions were different since many of their centres were so remotely located. She continued, “I can see it being attractive to the landlord if they can offer it to new tenants as an innovation. It could be positioned as enabling the retailers to get access to economies of scale. I see it working for retailers more as an ‘opt in’ or ‘opt out’ flexible scheme rather than as part of the terms of a lease, unless perhaps it is a short lease.”
A key concern for the retail property professionals was the apparent lack of providers capable and willing to offer a total FM solution for the large shopping centres where their economies of scale, level of skills and potential value for money would have a benefit. Lambert explained; “One problem we have is that there aren’t enough total FM suppliers operating in the market to enable us to tender work on that basis. If we can’t tender it then it is difficult to show best value to the retailers.”
While there was general agreement on this point, but there was also a range of experience around the table. John Michell, Head of Shopping Centre Management at Kings Sturge, said, “We generally use single service suppliers but recently we inherited a total FM run centre.  When we unpicked the contract we found significant over manning, fees on top of fees and a total lack of transparency. That said, I do believe that the total FM model is a good one if you have the right supplier.”
Offering a different perspective, Thomson said, “We generally use a single service supplier model but we recently inherited a centre run on a TFM basis. This has been very interesting and people assume that we are going to change it immediately. Obviously we will be looking at it closely but currently it seems to be a good operation.”
Philip Osborne, Head of Property Services at Land Securities suggested that the total FM model required “A different management structure in place than one for managing single suppliers. The requirements are totally different,“ he said.
Jeremy Waud, MD Incentive FM also recognised that concurred, there were now not
enough companies offering a total FM model in the retail sector, making effective tendering more difficult. However the larger landlords continue to lean towards these big companies because of the comfort factor.
There was concern expressed about the burden of the new CRC regulations. “The main issue I currently have,” explained Lambert, “is that there is no common model or approach. Each client appears to have their own reporting and measuring formats with different consultants. For managing agents it is costly and time consuming to report the same information in too many different ways.
Concluding, the debate Waud suggested that there was a role for the FM suppliers to work closely with landlords and managing agents to help provide a standardised approach and reduce the complexity.


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