The retail property market is constantly changing, driven by evolving consumer needs, rising inflation, the shifting legal landscape, and rapidly growing taxes and utility costs. These factors present new challenges for property landlords and managers, particularly when it comes to cost management. Meanwhile, a well-structured budget not only ensures control over financial liquidity but also helps anticipate future needs and make informed investment decisions. It may also be leveraged to strengthen a market position and boost shopping centre footfall levels which rose in the second quarter of 2024 by 5% year-on-year and by as much as 16% compared to 2022, according to the latest data from global real estate services firm Cushman & Wakefield. The firm’s professionals managing the Złote Tarasy and Plejada shopping centres take a closer look below at the art of effective budgeting.
The primary objective of property management, as stipulated in the repeatedly amended Real Estate Management Act of 1997, is to ensure that the property is kept in proper technical condition. The Act’s provisions require property owners and managers to anticipate needs and plan expenditure for routine repairs, refurbishments and upgrades, as well as to budget for the maintenance of common areas accessed by other co-owners. The property manager is also responsible for financial transparency and regular reporting,”
explains Maciej Sanetra, Director of the Złote Tarasy Shopping Centre in Warsaw, Asset Services, Cushman & Wakefield.
The strategic role of the budget
The budget should be aligned with the property’s growth strategy and take into account its objectives such as increasing or maintaining revenue levels, reducing costs and improving the property’s financial performance. Based on these objectives, the budget will include allocations for investments, major refurbishments and upgrades to improve the property’s functionality and deploy modern technical solutions to lower operating costs. The operating budget of a shopping centre should cover various expenses required to ensure its continuous operation, including the costs of advertising, events, social surveys, audits and legal services. The budget should clearly outline how the shopping centre is maintained and funded. In the case of retail properties, most operating costs are borne by tenants, while capital expenditure (CAPEX) is the responsibility of the owner. If necessary, property owners or managers may also explore other funding options, such as subsidising marketing initiatives,”
says Maciej Sanetra.
CAPEX, OPEX, MAREX - key cost components
Capital expenditure (CAPEX) encompasses major investments paid for by the property owner. These may include the costs of redevelopment, extension or upgrades, and investment in new uses and fit-out items to enhance or maintain the property’s appropriate technical, aesthetic or functional standard which is crucial for maintaining its competitiveness on the market. In contrast, operating expenditures (OPEX) encompass regular property maintenance costs, including daily expenses related to a building’s operations. In the case of retail properties, most of these expenses are covered by tenants, allowing landlords to focus on capital investments that will ensure a property’s long-term growth,”
says Maciej Sanetra.
Image matters
Marketing overheads resulting from long-term agreements or recurring expenses for major campaigns account for a significant proportion of a budget. The former include the costs of graphic design services, creative concepts, and the production of promotional materials such as posters, flyers or billboards. Another important item is the cost of periodic marketing research to verify strategy objectives and assess the effectiveness of campaigns,”
explains Paula Bartosik, Director of the Plejada Shopping Centre in Sosnowiec, Asset Services, Cushman & Wakefield.
The challenges of space leasing
The scope of adaptation works funded by the landlord should be clearly defined in a lease agreement. Landlords should not finance the costs of movable items such as furniture or merchandise. Typically, they carry out or finance improvements permanently attached to the premises, such as installation and/or construction work, directly for the tenant,”
says Maciej Sanetra.
Regular property appraisals for financial institutions, along with audits required to ensure regulatory compliance and the appropriate operation of a property, should also be factored in the budget planning process,”
adds Maciej Sanetra.
NOI, OCR and footfall - measuring shopping centre performance
A high NOI suggests that a property generates enough income to cover all operating costs while delivering a profit to its owner. In contrast, a low NOI is a red flag. It may result from high operating costs, excessive vacancies or short-term leases. A negative NOI indicates that the property is not only unprofitable but is also failing to generate enough income to cover its costs,”
says Paula Bartosik.
The number of shopping centre visitors has a direct impact on sales and, consequently, on tenants’ income. It is the responsibility of property owners and managers to maximise foot traffic in a shopping centre, both through branding campaigns and by curating the right tenant-mix,”
adds Paula Bartosik.
A high OCR may serve as a warning sign that operating in a shopping centre is becoming unprofitable for some tenants, particularly those from low-margin sectors like electronics, where high ratios can be hugely detrimental to profitability. It is important to note that there is no universal ‘healthy’ OCR, as it varies by industry. For example, while an OCR of 3% may be a red flag for electronics, 15% is quite healthy for F&B establishments,”
concludes Paula Bartosik.