Energy
After falling away at the end of 2006, at the start of 2007 inflation returned to energy markets with a vengeance. Prices peaked around the middle of 2008 and subsequently fell away into mid-2009 on the back of global economic turmoil and uncertainty and the recession in the UK. There is a view that as the economy bottoms out and growth re-emerges, energy prices will follow. Political and environmental issues will continue to put pressure on the supply side, whilst the continuing growth of the major emerging economies is creating additional demand side pressure. Long-term, risk-managed purchasing strategies, as well as improved demand management will remain at the fore.

M&E Services
Inflation on Maintenance costs has historically exceeded the RPI indices and this is unlikely to change even in the medium term as resources and skill sets continue to be an issue. The current historic low RPI is reflected in the proposed industry sector index increase, but in most cases suppliers are willing to forego increases and manage to a similar annual cost to retain business. Use of technology is becoming more prevalent to improve efficiencies, in communication and service levels, whilst achieving cost benefits.

The introduction of the AC inspections is a continuing part of the 'green agenda' and is adding to the costs of maintaining air conditioning systems. M&E contractors will be at the forefront of energy management initiatives and works to actively reduce consumption/CO2 emissions as part of the CRC's.

Cleaning & Environmental
As with security, cleaning has been affected by the increase in statutory annual leave. Again inflation has been mitigated by the impact of the recession. Economic recovery will remove this constraint and property managers will need to have worked out ways to manage costs down. The smaller increases in the minimum wage will not greatly affect costs, particularly in the current employment market.

Reduced availability of landfill sites and above inflation increases in landfill tax are encouraging greater efforts to recycle waste and to find innovative ways of reducing waste.

Fabric Repairs and Maintenance
Tenants continue to increase emphasis on their buildings being presented in excellent order, with corresponding planned maintenance programmes in place. This should have the effect of smoothing year-on-year costs and reducing unplanned exceptional expenditure.

The system of Energy Performance Certificates (EPCs) is becoming embedded, but a new element of environmental legislation will come to the fore from 2010 onwards - the Carbon Reduction Commitment (CRCs). This will place responsibility for accounting for carbon emissions with the ultimate UK parent company of any business consuming above a specified threshold. The detailed implications for property owners and managers are still being worked through, but what is clear is that organisations should have a clear strategy for measuring consumption accurately at every property they are responsible for. There will, as a consequence, be increased administration costs, but also risks (penalties) and rewards for owners on the performance of their property.

Security
The industry is now 3 years into the licensing regime in England and Wales and well into the renewal process for staff and managers. Licensing has not had the dramatic indirect effect on costs that was at first feared, although it did nudge up hourly charges by single figures. The increase in statutory annual leave entitlement from 20 days, in two stages, to 28 days, implemented finally in April 2009, has also had a small impact on hourly costs.

However, the impact of economic uncertainty (and latterly recession) has had a stabilising effect on costs as staff vacancies and churn has reduced.

Increasingly, smart suppliers and buyers are responding by looking for solutions which drive down cost, whilst maintaining or even improving security. For example, the greater use of technology, or simply questioning the basic operational requirement that lies behind many specifications.

Site Management Resources
We predict that Site Management Resources will remain fairly constant in terms of cost, with most companies adopting a no or low annual salary increase. The same pressures apply, with a limited pool of good quality facilities and building management staff and ever increasing training needs to keep pace with the legislative and technical developments.

Lift & Escalators
Lift companies and insurance inspectors are still coming to terms with SAFed's 'Guidelines on the supplementary test of in-service lifts (2006) and the way the new tests are to be called for by competent persons. Until this improves the previous guidelines, SAFed Lift Guidelines (LG1), are likely to be referred to where there are fixed frequency group tests.

A limited pool of good quality suppliers and labour will continue to put pressure on salary levels but the impact upon contract prices in the short to medium term is low.

Water
The industry regulator has agreed to above inflation rises to finance investment in aging infrastructure.

Conclusion

Expectations remain that will be increasing pressures on labour costs arising from statutory, regulatory and other environmental requirements, but that these will be offset by nil or below inflationary increases in the costs of labour other than for specialist areas.  Further legislative requirements i.e. air conditioning inspections, will also place upward pressure on service charge costs.  Energy costs continue to be volatile, but in general terms the pressures are now upward.  Finally the burden of new environmental legislation will predominantly be borne more by older, air conditioned stock where there is less opportunity to be gained from economies of scale and technical innovations.

In most cases however we consider that future trends in overall service charge costs will evidence increasing focus on cost-effective and value for money service charges reflecting the economic environment.

Jones Lang LaSalle looks forward to reporting on service charge spend in Oscar 2009 to review these trends.