In Prime Central London service charges for luxury buildings have generally gone up in line with inflation.
“The point at which you should be concerned about service charges is if they rise substantially above this rate.” says Simon Barnes of H.Barnes & Co. “This is an indication that there is generally something amiss and potentially a cause for concern unless money is being paid out for major works such as redecoration of the building or the replacement of a lift or communal boiler.”
What are service charges?
Service charges relate to a leasehold property and the associated running costs of the building such as communal heating, hot water, the lighting of communal areas, maintenance and upkeep of the roof and building structure and (in every case) the cost of insuring the building.
Often there is what is known as a “sinking fund” or “reserve fund” which is a charge that is made in addition to, but usually collected at the same time as a service charge, which is set aside to pay for future major works. For example, owners might be asked to pay in an extra £1000 or £2000 per year into a fund which is build up over time to pay for works to the building such as new lifts or redecoration of the common parts, rather than being asked to stump up £15,000 or £20,000 in addition to their annual service charge as and when these works need doing. This is usually the sign of a well-managed building, though admittedly it does benefit people who intend staying put for a long period of time rather than those who will only stay for a year or two.
Direct Line Research
Recently the insurer Direct Line commissioned some research suggesting that property service charges are rising rapidly – see http://www.propertyindustryeye.com/property-service-charges-escalate-rapidly-to-hit-owners/. The report states that increasingly these charges are no longer restricted to maintaining the common parts in apartment buildings. As the trend increases for new developments to offer amenities such as libraries, 24 hour concierge, cinemas, gyms and secure underground parking, the service charges are increasing.
Simon Barnes comments “Contrary to the findings of the Direct Line research, I would say that in Prime Central London generally there are no hidden service charges. The days have long gone when rogue landlords would charge unfairly. In PCL, charges will reflect the value of the property.
Solicitors will always investigate the management company accounts to ensure service charges are legitimate.
Although they may seem high, service charges ensure peace of mind for the buyer; that the building is well maintained and there is adequate provision to finance repair bills for any work, from repairing a leaking roof to refitting a new boiler, and maintaining common parts.”
The importance of Service Charges
“Service charges are absolutely essential for the successful running of a building. It is my experience that provided people feel they are getting value for money and that there is financial transparency so that they can see exactly where their money is going, they are happy to pay them.
It is only when we see buildings that have excessively high charges for no apparent reason that buyers get put off. Naturally, the more expensive the properties within building the less concerned people are about paying higher service charges, provided they feel they are getting something for the money they are paying.
As a property is a major asset, it makes sense to keep it in good order, so a service charge allows for unforeseen eventualities and is a way of budgeting for this. Where service charges appear especially low, it should raise alarm bells about how well cared for a building is.”
For further information on service charges in London visit https://www.london.gov.uk/moderngov/documents/s8756/Appendix%202%20-%20Highly%20Charged%20report.pdf