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ANALYSIS OF HISTORICAL CONSTRUCTION COST MOVEMENTS IN SCOTTISH SOCIAL HOUSING FINAL REPORT

6.0 MANAGEMENT COSTS

6.1 Introduction

Average supervision and management costs of Scottish local authorities in 2003/4 are estimated at 474 per house (35% of total management and maintenance expenditure) ².

Management costs accounted for 38% of the total management, maintenance and repair (i.e. current) costs of Registered Social Landlords in 2001/2 ³. A further 16% of this expenditure related to maintenance overheads. These can be defined as maintenance staff and other departmental costs that cannot be attributed directly to either maintenance or repair costs, Clerk of Works costs or the overhead that can be attributed to providing a maintenance and repairs service, such as share of finance, general administration etc.

This section of the study examines sources of information on management costs and the principal input costs experienced by local authorities' housing management function and Registered Social Landlords (RSLs) in Scotland. Changes have been analysed from 1985 or 1987 depending on availability of data.

6.2 Wages and salaries

Wages and salaries represent the largest proportion of costs to local authorities and RSLs' housing management functions.

6.2.1 New Earnings Surveys

Chart 6.1 plots real earnings of full time non-manual employees from 1985 to 2002 based on ONS New Earnings Surveys. The data is based on a survey of earnings carried out in April of each year. The chart plots the figures for Great Britain as a whole and for Scotland and the North of England.

The data shows that in Great Britain, average non-manual earnings rose from 184 per week in 1985 to 515 in 2002, a rise of 180%, equivalent to a compounded average of 6.2% per annum. In Scotland the equivalent figure rose from 177 in 1985 to 469 in 2002, an increase of 165% or 5.9% per annum. The increase in the North of England over this period was virtually the same at 162%, equivalent to a compounded average increase of 5.8% per annum. Over the same period, the GDP Deflator rose by an average 2.6% per annum.

Chart 6.1 Earnings of Full-time Non-manual Workers

Table 6.2 plots the real increase in non-manual earnings over this period, expressed as an index for each location.

Chart 6.2 Index of Real Earnings of Full-time Non-Manual Workers

The chart illustrates that real earnings growth of non-manual workers has been lower in Scotland than in Great Britain as a whole but very similar to that in the North of England. Over the 17 year study period, the margin has progressively widened, reflecting a progressively tighter labour market but particularly so in many parts of England.

The chart and the table illustrate fairly steady growth throughout the whole study period though with reduced growth (0.9 to 1.3% per annum) in the mid period 1992-1997. Earnings growth in Scotland has moved progressively closer to the Great Britain average over time and over the last five years has been very similar (2.1% annual average growth compared to 2.2% for Great Britain as a whole).

6.2.2 Average earnings statistics

These figures for Non-Manual workers from New Earnings Surveys are slightly higher than those derived from general average earnings data compiled by the ONS to construct the Average Earnings Index (AEI). AEI data shows that average earnings in the whole economy increased by 156% (33% in real deflated terms) between 1985 and 2002 while average earnings in service industries rose by 151% (30% in real terms). (Compare 180% (45% in real terms) from New Earnings Survey for Great Britain). These figures are only available on a Great Britain wide basis.

From 1990 separate data are available for Private Sector Service Industries. Chart 6.3 plots Average Earnings data for Private Sector Service Industries, Service Industries generally, the Whole Economy and data from the New Earnings Survey for Great Britain from 1990 (all deflated to show real change).

Chart 6.3 Average Earnings (constant prices) - Great Britain

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The chart and table illustrate an apparent slightly higher rate of growth in New Earnings Survey data than indicated by Average Earnings data. This differential may be due to different sampling methods rather than structural differences in earnings trends.

These figures show that real average earnings in Private Sector Services have closely followed the trend of real average earnings in the economy as a whole since 1990. Particularly since 1997 there has been little difference between Private Sector Services Average Earnings data and New Earnings Survey data, both rising at 2.1 to 2.2% per annum in Great Britain as a whole.

6.2.3 Conclusion

From these studies it can be deduced that private sector services earnings can be expected to follow UK wide trends. History shows a slightly lower rate of earnings growth in Scotland over the long term but very little difference between Scotland and Great Britain as a whole over the last five years.

6.3 Property

Another clearly identifiable cost centre related to Management Costs is that related to property occupation.

6.3.1 Rents

General practice surveyors such as DTZ, FPD Savills and Insignia Richard Ellis compile data on office rents on both national and local bases. Data compiled by Jones Lang LaSalle have been used in this study to track office rents over time. Their '50 Centres Office Rents' series is a national guide to prime rents. It provides comparisons of the top rents achieved and rental levels currently achievable in the major towns and cities of England, Wales and Scotland.

The noted Top Achieved Rent for offices has been tracked for Edinburgh, Glasgow and Aberdeen since 1987 and are shown in Table 6.1, both in nominal terms and deflated to constant prices.

Table 6.1 Top Achieved Office Rents in Scotland 1987 - 2002

Source: Jones Lang LaSalle: 50 Centres Office Rents

The table above clearly illustrates the sharp growth in office rents that occurred throughout the U.K. between 1987 and 1991 followed by a drop in rents as demand for offices dried up. The mid 1990's saw a fairly stable period for office rents. Post 1998 has heralded a fairly mixed demand for office space in Scotland. Rents in Edinburgh leapt between 1999 and 2000 while Aberdeen experienced a slight drop in rental values being achieved. Rents have been static in all three centres for the last three years.

An average of the rents from the three main centres has been adopted as a proxy for average rental growth throughout Scotland. Real office rents, deflated by the GDP deflator, have grown by 33% since 1987.

The table plots top achieved rents in Scotland's three major cities, where office rents, particularly in Edinburgh, have outgrown rental growth in many other towns and cities. Office rents in most other locations are unlikely to have matched the same pace of growth.

Housing transfers often result in local authority housing management offices also being transferred to Registered Social Landlords, in which case office rental costs may not be a relevant consideration.

6.3.2 Service charges

Jones Lang LaSalle also produce an annual Service Charge Analysis for Offices, published under the name of 'Office OSCAR'. The data is compiled from the Service Charge sums paid by occupiers to the owners of multi-let office buildings.

Items forming the analysis include Cleaning costs, Repairs and Maintenance, Heating and Maintenance, Security costs, Wages, Management costs and Energy costs. Separate series of data are compiled for air-conditioned and non-air-conditioned buildings. The data relative to non-air-conditioned buildings have been used in this study.

The data show that Office Service Charges for non-air-conditioned buildings, on a national average basis, in real terms have fallen by 4% since 1985 or by 13% since 1987. (The figure for 2002 has been assessed by Davis Langdon & Everest). Jones Lang LaSalle do compile data for separate locations, including Scotland. However, sample numbers are much reduced and the regional data was not readily available over a reasonable period of time, so the more reliable national average data has been used in this exercise.

6.4 Management Cost Model

A simple cost model representing management costs has been compiled by combining average earnings statistics, property data and retail price indices.

The Retail Prices Index excluding mortgage interest payments (RPIX) has been used as a measure for the cost movement of other components of management expenditure not associated with staff or property costs.

Chart 6.4 illustrates graphically the composition of the simple model and that staff costs represent the overwhelming majority of costs faced by housing management bodies.

Chart 6.5 plots the movement (since 1987) of the four components of the Management Cost Model together with the Model Index itself, all portraying real cost change.

Chart 6.4 Management Cost Model (make-up)

Chart 6.5 Management Cost Model (trends)

Management costs, as indicated by the composed model, have risen by 24% in real terms between 1987 and 2002, an average rise of 1.5% per annum. It should be recognised that, as the primary data available in connection with management costs is generic, rather than specific to the social housing sector, this analysis needs to be applied with care. However it is considered that the trends displayed by the data analysis above should be representative of the management costs incurred by local authorities' and Registered Social Landlords' housing management functions. As with the capital and maintenance cost trends observed in Chapters 2 and 3, these trends exclude the effect of rising productivity on the management function. More is said on this subject in Chapter 11.

6.5 Conclusion

The Management Cost real growth of 1.5% per annum over the whole period, fuelled by earnings growth of 1.7% per annum and increases in office rents of 1.9% per annum, is well in excess of all of the construction capital and maintenance costs and tender and output price measures examined.

Management costs are largely driven by wages and salaries. Average earnings have consistently grown ahead of most other inflationary measures over the whole study period. The main reason why real earnings growth has not impacted that heavily on the businesses of local authorities and RSLs is that, over this period, the UK workforce, including local authority and RSL workforces, have become more productive. Although management costs have risen, 'output' produced by the management function can also be expected to have increased, thereby offsetting (in part or whole) the real cost increases. Developments in information and communication technology are almost certainly part of the explanation for these productivity improvements (as for virtually all sectors), as it seems likely they will continue to be in the future.

Across the UK economy as a whole throughout the 1980s and 1990s, productivity (as measured by GDP per worker) has risen in general terms by an average of about 2% per annum. Whilst specific productivity series for local authorities and RSLs are difficult to establish, if their workforces' productivity levels have grown at around the UK economy average, then the 'unit cost of output per worker' will not have changed significantly over time (and may have even fallen). This suggests that, in broad terms, real rising wages are probably not imposing a drag on local authorities' and RSLs' businesses because the additional wage bill is being paid for by higher productivity levels.

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