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.
Although legal regulations provide a starting point, true success in retail property management depends on many other factors, including effective collaboration between the owner, manager and tenants - also in financial matters.
The strategic role of the budget
Sound financial management is crucial for successful property management. A budget in the hands of an experienced manager is a multi-faceted tool that serves not only to control costs but, more importantly, to optimise operations and to make long-term strategic plans - even over a five-year horizon. A good example of such an approach to property management is the Złote Tarasy Shopping Centre, where investments and expenditures are planned in advance, allowing for better control over the property’s financial performance and an assessment of its profitability.
“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
The budget of a retail property takes into account various costs such as CAPEX, OPEX and MAREX, to which expenses related to various aspects of a property’s operation should be precisely allocated.
“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.
Marketing expenditure (MAREX) is another key category of costs shared by tenants and frequently also by property owners committed to supporting promotional activities designed to boost footfall.
Image matters
Building the brand of a shopping centre is a key factor in attracting both the right tenants and customers. The implementation of a marketing strategy comes at a cost and should include external communication, with the rental of advertising spaces, as well as various events, such as branding campaigns, concerts or workshops, depending on the strategy and the desired image of the shopping centre. While such expenses vary by project, they are incurred regularly.
“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.
Cost categories also include the expenses for paid online campaigns, mailing newsletters, and the rental or purchase of seasonal and festive decorations in particular.
The challenges of space leasing
Retail space leasing generates another pool of expenses borne by property owners, including in particular the costs of fit-out or adaptation of premises to a tenant’s individual needs.
“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.
The property manager also needs to account for legal costs in the owner’s budget, including the costs of drafting and negotiating leases, debt collection and representing the owner in court proceedings. Another important consideration is the cost of maintaining vacant space, including utilities, security and maintenance services which can place a significant strain on the budget.
“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
Effective commercial property management is key to achieving a high net operating income (NOI). A high NOI is indicative of not only a property’s financial stability but also efficient management including both tenant retention and control over operating costs.
“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.
Another factor important to property managers and tenants is footfall which measures the number of people entering a shopping centre.
“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.
The Occupancy Cost Ratio (OCR) is a key performance metric in the collaboration between a property manager and a tenant. It measures the percentage of a tenant’s revenue going toward occupancy costs and indicates whether a tenant is able to generate profits after paying them.
“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.
Effective financial management in the retail property sector requires a multi-dimensional approach that integrates careful budgeting with flexibility in adapting to rapidly changing market conditions. Property owners and managers who skilfully balance operating costs and investment expenses, while continuing to invest in brand building and tenant relationships, are better positioned for long-term success. With growing competition and shifting consumer preferences, the ability to foresee future trends and market needs is becoming crucial alongside successful resources management. This approach is key to maintaining a property's competitiveness and financial stability, ensuring satisfaction for both owners and tenants.