Service Charge Budgets for New Block Developments
The average service charge in the UK reached almost £1,900 per annum in 2016 (Direct Line for Business, 2016), up over 30% from 2014, and is set to continue rising with the growth of developments. It is more important than ever for tenants and leaseholders to understand how agents put together and manage service charges particularly for new developments.
We at Spencer understand that service charges must be reasonable and, as with any budget, must serve a plan which ensures effective block management without any nasty surprises. Sadly, some managing agents have been known to purposely keep the initial service charge low in order to attract leaseholders and tenants to new blocks only to hike prices or request further funds at a later date. This is not the Spencer way.
New block developers normally require a service charge budget long before the development is completed. A key challenge in setting up the initial budget for new developments is the uncertainty around the costing, particularly the more fixed items such as insurances and utilities. This creates further challenges if there happens to be a shortfall. One is appearing as an agent intentionally underestimating the true costs of service charge in order to secure leaseholders and tenants. Another, which everyone wants to avoid, is requesting further funds to cover costs!
Both challenges can be overcome with research and by erring on the side of caution when putting together the initial budget. This means gathering estimates based on as much current information as possible about the development, making comparisons with similar bocks, analysing the market, and even overestimating to a reasonable degree. This way costs are estimated as accurately as possible and a more flexible plan put in place.
Once the block is completed and the more fixed cost items take shape we may find that some are greater than estimated. Perhaps the block was a redevelopment of an old building which requires annual asbestos inspections or the door entry and smoke ventilation systems require greater management than anticipated. Managing any shortfalls without delivering a nasty surprise can be found in the more flexible areas of the budget.
The more flexible areas are those which can be changed at relative ease and short notice; key examples are frequency of cleaning or lift service visits. Once the block is fully occupied we may find that the frequency of cleaning can be reduced while still maintaining a clean block. Such changes free up the funds needed for to cover the shortfalls in the more fixed areas of the budget. Any surplus monies can then be placed into a sinking fund or even reimbursed to leaseholders at the end of the year. Far better than the alternative!
The key is to develop a reasonable service charge budget with the initial information available which can also deliver the plan it is developed for; to allow the agent to effectively manage all aspects of the block without any nasty surprises for the residents.
Ashley Elliott is Spencer's Accountant and Expert in Property Maintenance costings - he is Spencer's Right-hand man!