Surging service charges add pressure to struggling landlords

New research by landlord insurance provider, Direct Line for Business, has found that property service charges are rising rapidly with 33% of management companies increasing these fees in the last two years.

Related topics:  Landlords
Warren Lewis
9th March 2016
Black Houses

The average service charge or fees leaseholders pay to cover their share of the overall building maintenance, now stands at £1,863.  This cost alone represents more than two months of the average monthly rental income received by landlords, which stands at £906. In addition to this, they will also have other costs to think about such as paying tax on these monies, mortgage payments, management and agency fees and any ground rent fees which are now on average £371 a year for a new build and £327 for a property pre-2016.  
 
The service charges for new build properties, coming on the market in 2016 are significantly greater than for older dwellings at £2,777. This is 96 per cent higher than the average for an older property. Service charge levels also vary markedly between developments. One new build development coming onto the market in Croydon in 2016 will see home owners paying £1.55 per square foot in service charges, while a development in Lambeth coming onto the market in 2017 is charging four and a half times more at £7 per square foot.  
 
There is an increasing trend for new builds to include amenities such as libraries, 24 hour concierge services, gyms and cinema rooms that is contributing to the increased cost of service charges, but also offers added value for landlords looking to invest in this type of property.

Recent moves by developers have seen more private housing stock owned by freeholders subject to service charges. Owners of freehold properties situated on private roads or private estates are being charged for upkeep of roads and gardens. In one example owners of every four-bedroom property situated on a development in Guildford are charged £900 a year for upkeep of the road and communal gardens.
 
Nick Breton, Head of Direct Line for Business says: “Service charges are often a hidden cost, which should be factored in when considering the affordability of a property.  In some cases service charges are uncapped and can escalate rapidly.  Landlords need to take into account all associated costs when purchasing a property, such as service charges, ground rent and taxes that may impact their rental yield.
 
Direct Line for Business’ free Mobile Landlord App can help landlords keep a track of expenditure, when charges are due to be paid and the impact on the yield of a property.”
 
The method for calculating service charges also varies between developments. In some cases it is a flat rate for all properties, while for others it is determined by the number of bedrooms or the square footage of a property.  Service charges usually cover repairs to communal areas of a development such as windows, drainage and the roof. They may also be used to establish a sinking fund for major renovations.  In some cases they are also used to pay for shared services such as gardeners, landscapers, concierge services or cleaners. 

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