Service Charge Index 2024
QUARTER 2, 2024
Service Charge Costs have been getting a lot of negative press lately with the media and even leaseholders themselves blaming landlords or their managing agents for the rising charges. It is clear from the narrative that a large number of people just simply do not understand what service charges are and how they work. There is a common misconception that someone is making a profit.
The Property Institute has done excellent work trying to bust this myth using real data. Their Service Charge Index 2024 report can be found on their website: click here to read more.
The purpose of this blog is to explain what service charges are, and as far as we can explain, the real reasons why they are rising.
What are service charges?
In a nutshell, service charges are a cost recovery of money spent on your building or estate. The word “recovery” is perhaps what confuses people though because in most cases, service charges are collected in advance of the money being spent because otherwise, where else is the money coming from? This is why your managing agent will write a budget of expenditure for the estate for the financial year and collect funds based on that budget. If less money is spent during the year than was collected (known as an operating surplus) it is either credited back to leaseholders or transferred into their reserve fund, whichever the lease stipulates. On the other hand, if more money is spent on the estate than was budgeted for during the year (known as an operating deficit) then this overspend needs to be recovered from leaseholders as a balancing charge. Either way, service charge accounts must reconcile back to zero each year. There is no profit or loss.
This is also why the amount that you pay each year will vary – because the budget will vary each year depending on a number of factors, which we will come onto further down. Exactly what your service charges include will depend on what your lease covenants you to contribute to, but typically, service charges will include the common parts cleaning, the grounds maintenance, the service and testing of assets including compliance with H&S legislation, maintenance and repair of the common parts or communal assets, buildings insurance, utilities supplies, surveying and managing agents fees, and site staff costs where applicable, as well as other general expenses incurred in the upkeep of the estate.
How much of the service charge you personally contribute to will also be stipulated in your lease. In some cases, it will be a percentage. In other cases, the lease will say something along the lines of, “The due proportion is to be calculated primarily on a comparison at any relevant time of (a) the area of the Premises, and (b) the aggregate area of the Building”. Meaning that your service charge apportionment is calculated according to your flat’s gross internal floor area.
Once you pay your service charge apportionment to your managing agent, the funds will be held in trust in a ring-fenced, designated bank account as per Section 42 of the Landlord and Tenant Act 1987. This means that the funds belong to the landlord/management company/RTM (whoever has the responsibility in the lease to collect the funds), not to the managing agent. At Olympus Management we also apply all interest accrued directly back to each client account. It is your money, not ours!
Why are service charges rising?
So onto the question that everyone is asking – why are my service charges going up?
We have heard people say, “There is a cost of living crisis don’t you know. All my other costs are going up, so I don’t need service charges to go up as well.”
Unfortunately, as we have explained above, service charges are those costs. They are impacted by inflation, the economic climate and political changes the same as everything else. And in the last 8 years alone, there have been a number of events that have had a national, and even global impact on the economy:
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Brexit (Referendum in June 2016, Brexit in January 2020)
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Grenfell (June 2017, legislation in 2022)
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The Net Zero Government Initiative (June 2019 the UK committed to net zero by 2050)
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The COVID-19 pandemic (global lockdowns were announced in March 2020)
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The war in Ukraine leading to the energy crisis (Russian invasion in February 2022)
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The change from Conservative to Labour Government in the UK (July 2024)
TPI conducted their study over the last 5 years because 2019 pre-dates The Pandemic, the energy crisis, and the passing of the Building Safety Act 2022 and the Fire Safety (England) Regulations 2022, therefore providing a benchmark of “normality” (we say this in inverted commas because this year was still impacted by Brexit uncertainty). The results are eye-opening.
The Stats
Between 2019 – 2024 cumulative inflation was 23% which anyone who has been shopping in the last two years will have felt the brunt of. According to the survey by TPI and the Service Charge Index 2024 which they then produced, total service charges during this same period have risen by 41%. The good news is that from 2023 – 2024, the increase was only 3%.
The main cause of these cost increases is buildings insurance which from 2019 – 2024 has risen by 92% on estates with 18m+ buildings, and 68% on all other estates.
A similarly large driver of service charge increases between 2019 – 2024 is utilities which have risen by a staggering 73%.
After these two primary causes of service charge increases in the last 5 years, you then have professional fees (excluding managing agents fees) which have risen by 69%. It should be noted here that more surveys are being carried out due to the changing legislative requirements, rather than surveyor’s fees increasing. And further to this, although 69% is a large increase, professional fees still make up a very small portion of the overall service charge (only 1% year-on-year).
For the same reason, in the last 5 years, general health & safety costs have risen by 40%; general expenditure has risen by 39%; onsite staff costs by 37%; repairs and maintenance costs by 36%; and reserve fund contributions by 34%.
At the bottom of the list is managing agents fees which have risen by only 21% in the last 5 years, which is less than cumulative inflation.
TPI also ensured that they included a fair representation of resident owned / controlled estates and third party landlord owned estates to highlight any possible elevation in service charges on third party landlord owned estates. The data, in fact, showed the opposite. Although the difference is negligible, the resident owned / controlled estates actually had service charges which were ever so slightly higher (by an average of £50 per leaseholder), showing that it doesn’t matter who is setting the budgets, the costs are increasing all the same.
Inflation
Inflation impacts businesses and households alike. It just so happens that the services which need to be met by leasehold service charges are particularly affected by inflation – most obviously, repairs and maintenance costs because both the labour costs and the costs of materials are impacted. When you consider that the UK has an aging housing stock requiring increased spending on repairs and maintenance, it is not surprising that the general repairs and maintenance costs have increased by more than inflation in the last 5 years.
In May 2022, in the wake of Brexit, the Pandemic and the invasion of Ukraine, construction cost inflation hit an all time high of 10.4% (Office for National Statistics). Brexit meant that materials sourced from mainland Europe now had a tariff applied. The Pandemic led to suppliers of wood and metal to slow production down, and then when the lockdown rules started relaxing in 2021, there was an unexpected building boom which caught the suppliers off guard. Russia’s invasion of Ukraine led to a peak in steel prices in the spring of 2022. In addition to all of this, both Brexit and the Pandemic led to a shortage of laborers which created a tight labour market, and just as the costs of materials were impacted, so was the general cost of living. Combined, this led to an inflation of wages in the labour market.
Unfortunately, even in 2024, inflation is still sitting above the Bank of England’s target of 2%, meaning that unless we have a period of deflation – which arguably could cause worse problems – the increased prices that we are seeing are here to stay.
Buildings Insurance
These higher costs of materials are also impacting our buildings insurance premiums because it is increasing rebuild values which insurance companies are having to account for in their prices.
What a lot of people don’t know though is that Brexit has also had a big impact on UK insurance companies themselves. You might think that there should be no problem if you were using a UK insurance company to insure a UK residential building. However, the vast majority (if not all) of the reinsurance companies are EU based. A reinsurance company is essentially insuring your insurer, and with the UK insurers no longer being subject to the EU regulations, the reinsurers are seeing them as higher risk and therefore, applying higher charges as this market hardens.
As we all know though, the biggest impact on insuring residential buildings in the UK has been the Grenfell tragedy. Not just insurers, but everyone’s eyes were opened to the true risk of residential blocks. Post-Grenfell, a number of insurers pulled out of the residential market overnight, and those that remain have become incredibly risk-adverse meaning that premiums are sky-rocketing for high-rise buildings, buildings with cladding, and buildings with any kind of noted fire risk. Between 2019/20 – 2020/21, flat owners saw their premiums rise by an eyewatering 400%.
However, we also need to examine the rule of supply and demand. Not just because there are now less insurers in the residential market but because – perhaps surprisingly – there are also more buildings. During the Pandemic, construction was one of the only sectors not to get locked down. As the roads were otherwise empty, the construction of new residential buildings were being completed at unprecedented rates leading to an increased demand for insurance and a reduced supply of insurers.
Utilities
The energy crisis of 2021/2022 was arguably the most dramatic of all the cost increases that we have seen. In the summer of 2021, economies were opening up again after the covid-19 lockdowns which saw the prices of gas, electricity, oil and other fuels start to rise. There were also rumblings of a war between Russia and Ukraine – Russia was building up a large military presence on the Ukraine border and in Belarus, and Vladimir Putin was publicly demanding that Ukraine be barred from NATO. In late 2021 and early 2022, the prices were rising still.
On 24th February 2022, Russia invaded Ukraine, starting the largest conflict in Europe since WWII and causing the energy prices in Europe to peak, reaching record highs in the UK. In April 2022, a typical household’s energy bills increased by 54% (House of Commons Library). For most of 2022, there were disruptions to supply which held the wholesale prices of gas and electricity at these record highs. In 2024, utility costs have come back down but have still not returned to their pre-war levels, remaining at 29% above their winter 2021 price.
In the UK, communal heating and hot water systems serving a block of flats is considered a commercial energy contract which until the 2022 energy crisis, actually benefited from lower rates than domestic contracts. 2022 saw this change, however, Government intervention brought this back under control with the Energy Bill Relief Scheme (EBRS) applying a cap on commercial contracts between 1st October 2022 – 31st March 2023.
Unfortunately, even though energy costs did eventually come back down somewhat in 2023, those of you with a year end on or before 31st March will likely have suffered another year of the increased budget for energy costs because when it was announced that the EBRS would only last for 6 months, everyone anticipated another hike in costs in April 2023 when the cap ended.
Even those buildings which had made use of the Government initiatives to subsidize energy efficiency improvements were not immune because the return on those improvements will take years to transpire. In the meantime, there are the additional costs of EV charging, or maintaining solar panels etc.
We are yet to see what affect the change to a Labour Government will have on the costs of living.
Building Safety Regulation Costs
The final costs which we will examine in this blog are the newly introduced Building Safety Regulation Costs. These costs simply did not exist in service charge budgets in 2019. But today, in 2024, they are making up an average of 4% of the service charge. Unlike with cladding remediation costs, the Government has not made any provision for anyone other than leaseholders to cover these costs.
Most helpfully, there has been some confusion surrounding building safety costs from the top down. The Building Safety Act 2022 did indeed introduce certain leaseholder protections, and the Government’s Building Safety Pledge committed the developers who signed to remediating life-critical fire safety works in buildings over 11m at their own cost.
Further to this, there is now an Insurance Broker Pledge which commits those who have signed to cap their commission on the insurance of residential buildings over 11m with fire safety defects, protecting leaseholders from extortionate premiums.
However, leaseholders are not protected from the costs of complying with the new legislation moving forwards. Michael Gove himself seemed to forget to distinguish between cladding remediation and ongoing building safety compliance which caused a lot of confusion amongst the leaseholders who then started receiving bills for safety costs.
Even today, 2 years after the Act was passed, there is still so much uncertainty around these costs, created by how many variables there are – for example, is it a single building or are there multiple cores? If there are multiple cores then you need to register each core and produce a separate safety case report per core, as well as all of the other required documents. Do adequate plans for the building/core exist? If not, you need a specialist surveyor to produce them. Even buildings which are not over 18m are still required to have regular communal fire door and flat front door surveys in place, but if they are under 11m then the frequency of these surveys is unclear. The list goes on.
Another issue which is presenting itself as the requirements involved with this new Act gradually get clarified is that the costs of insuring a company or individuals to give fire safety advice have increased, meaning that not many companies are doing it and the demand is far exceeding the supply. As of yet, these fees are not being capped and it is up to the managing agent (or whoever is responsible) to be even more diligent than usual when spending leaseholders’ money.
TPI’s Service Charge Index 2024 included 50 buildings that were registered with the Building Safety Regulator. On average, these buildings were spending £28,000 on building safety costs. 20% of them were spending over £50,000. There are large, complex developments in London which have exceeded £100,000 on building safety costs.
Whilst it is the leaseholders who suffer the additional charges related to these new regulations, there is no doubt that the new Building Safety Act 2022 is necessary for the safety of those very same leaseholders and their tenants.
Managing Agents Fees
Lastly – in this blog and in the list of increased service charge costs – the managing agents fees have risen below inflation in the last 5 years. Managing agents are being blamed in the media for the increased costs and yet they are, seemingly, having the smallest impact. Most national managing agents have made the decision to do more for less, resulting in the end customers experiencing a decline in service.
Too often we hear the question, “What do managing agents do?” We have a blog on this as well which will hopefully answer that question if you find yourself asking it. Everything that we have explored above – the affects of Brexit, the Pandemic, the energy crisis, the introduction of new legislation etc. – has actually led to more work for agents. Property Managers are having to work harder to negotiate costs and ensure value for money for their clients, and they are having to do a huge amount more work to ensure that the buildings they manage are compliant.
Different agents have different ways of structuring their fees. Some might offer a seemingly very reasonable management fee, but then take commissions on services and apply ancillary fees outside of the management fee. Olympus Management do the opposite – we might not be the cheapest tender that you are presented with, but you can guarantee that the fee we give you is the total fee you will be charged. We include a cost for everything that we do in that fee, and the only commission that we take is on building insurance premiums which we will disclose before renewal, and we will only ever take if it does not increase your current premium.
Our Mission is to “Enhance community engagement and asset value with transparent leasehold management”. We hope that by offering completely transparent fees, we are doing our bit to bust the media myths and rebuild trust in the profession. We want our clients and leaseholders to have absolute confidence that we are doing all that we can to mitigate these rising costs for them.
If this blog has been of interest to you then please do share it with your network. And if you would like to know more then feel free to contact us anytime.
