What Do Service Charges Mean for Property Investors by Michael Johns

Service charges relate to leasehold property where the leaseholders pay a service charge to the landlord for services provided as determined by the lease.  This charge will generally consist of:  


  1. Day to Day Expenses such as cleaning, insurance, staff salaries, maintenance etc. 

  1. Cyclical Expenses such as communal redecoration 

  1. Reserve Funds which will pay for long term expenditure such as roof replacement etc. 


The cost of a service charge will normally be budgeted in off-plan developments based on expected costs.  This can change and the landlord is legally obliged to provide audited accounts to the leaseholder if requested.  The cost is heavily dependent on:  


  1. Staff – concierge services is a common cost these days.  A concierge can be a sign of a quality establishment as 5 star hotels have them, so potential buyers are easily drawn in, but this service normally costs the combined owners £30,000 to £40,000 per year. 

  1. Security – there is a large difference in cost between having on-site or off-site security, although it is clearly an important area.  Choosing the correct solution for the property is crucial. 

  1. Facilities – gymnasiums, swimming pools, saunas etc all need to be monitored and maintained and property developers will sometimes include such facilities in order to assist in the sales process without considering the future cost to the owners. 

  1. Quality of Build – a poor build quality will require more regular attention and cost.  I always advise potential buyers to visit a developers previous developments and pay close attention to communal areas and the quality of finish.  Also, what does the building look like from the outside after 5 years? 

  1. Gardens – it is not just the size of the garden that is important, but the make up of it.  Is it self contained?  Does it require regular attention? 

 

Selling properties off-plan, I am surprised how many investors pay more attention to the forecast service charge than the factors above, and the reputation of the company responsible for managing these on-site services.  A low service charge can be attractive to investors but can be extremely damaging if it is set too low and can lead to a run down and unattractive development.  I would be more concerned with ensuring that my investment was in good hands and well managed. 

If you feel that you have paid too much and you want to take control of the matter, I would advise: 

 

  1. Set up an owners committee 

  1. Ask for audited accounts 

  1. Contact LEASE - a company who can assist you in taking control of the situation 

 

Although I have assumed, above, that the management company have acted honourably and that their audited accounts are a true reflection of the actual costs and the costs you can reasonably expect to run the development, there are cases where companies have taken advantage of this by fabricating costs in partnership with service providers and sub-contractors.  This will obviously cause your service charge to be too high.  In this case, I would advise you to follow the steps above and to ask for comparable quotes from similar service providers and then contact LEASE. 

Finally, judging a potential investment on the forecast service charges provided can be dangerous.  Good quality developers will have a keen interest in the future success of their work and will hire an experienced and professional management company to look after the building.  They have no interest in overcharging you at this point – they have nothing to gain.  But by providing you a realistic forecast, this enables investors to see a true picture of what they can expect. 

On the flip-side, short-sighted developers, who are only interested in selling their apartments and walking away are more likely to fabricate a lower and unachievable service charge rate.  This leads to one of two unhappy endings for the investor.  Either the service charge is dramatically increased upon instruction of a reputable management company and their income projections are blown away! Or they select a low quality management agent who cannot afford to keep the site in the manner expected by the owners.  Gardens are not tended, lifts are not repaired, the electricity for communal lighting is cut off. it turns into an investors nightmare.

If you are interested to find out more on service charges, investment property or anything else property related please contact our office on 01244 343 355

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