We all like nice things right?
That brand new city center apartment block with the aquarium in the reception, the gym, concierge, landscaped gardens, helipad (ok maybe no helipad but you see the point).
The problem is that none of those things are free.
And increasingly, investors are finding that rising service charges can turn what looked like a strong investment on paper into something far less attractive in reality.
Worse still, if those charges get too high, they can start to affect how easy the property is to mortgage and sell.
Recent research suggests service charges across England and Wales have been rising rapidly, with the average leaseholder now paying more than £2,400 a year. Perhaps more importantly, a growing proportion of flats now have annual service charges equivalent to more than 1% of the property’s value.
And this isn’t simply an issue of losing a few hundred pounds from your annual return.
In some cases, high service charges can affect mortgageability, resale demand and ultimately the value of the property itself.
When Does a Service Charge Become a Problem?
There isn’t a universal rule saying that a property becomes unmortgageable once the service charge reaches a certain level.
However, lenders are increasingly interested in affordability and whether ongoing charges could make a property difficult to sell in the future.
Imagine a £200,000 apartment with a £4,000 annual service charge.
That’s 2% of the property’s value every year before you’ve even considered mortgage interest, letting fees, maintenance or tax.
For an investor, that significantly reduces the true net return.
For an owner-occupier, it makes the property considerably more expensive to live in.
And for a mortgage lender, it raises an obvious question:
Will someone still want to buy this property in five or ten years’ time?
Look at the Building, Not Just the Apartment
This is where investors need to be careful.
A beautiful apartment can sit inside a building that is extremely expensive to operate.
Developments with extensive facilities can look fantastic in a sales brochure, but facilities such as:
- Swimming pools
- Gyms
- Concierge services
- Multiple lifts
- Underground parking
- Large landscaped communal areas
- Communal heating systems
- Extensive security systems
all have to be maintained.
And ultimately, the leaseholders pay for them.
A concierge and residents’ gym might help sell the lifestyle today, but ask what those facilities could cost to operate and replace over the next 20 years.
Older and Listed Buildings Can Carry Additional Risks
The same principle applies to converted historic buildings.
A Grade II-listed development can look stunning and offer plenty of character, but maintaining a listed building can be more complicated and expensive than maintaining a standard modern property.
Specialist materials, conservation requirements and restrictions on how work can be carried out can all increase costs.
That doesn’t make listed property a bad investment.
It simply means investors need to understand exactly what they’re buying into and whether adequate reserves exist for future works.
Be Careful With Some Office-to-Residential Conversions
We would apply similar caution to certain developments created through permitted development conversions, particularly older office buildings converted into apartments.
Again, plenty of these schemes work perfectly well.
But investors should look carefully at the underlying building rather than being distracted by a newly fitted kitchen and attractive furniture pack.
The questions worth asking include:
- How old is the original structure?
- What communal mechanical systems remain?
- How expensive will lifts, roofs, windows and communal areas be to maintain?
- Is there a sinking fund?
- Are major works expected?
- How has the service charge changed in previous years?
A newly refurbished apartment does not necessarily mean you’re buying a newly constructed building.
That distinction can become very important several years down the line.
High Service Charges Can Create a Vicious Circle
There is also a potential knock-on effect.
Suppose a flat is worth £300,000 with a £2,500 annual service charge.
If the property’s value falls to £250,000 while the service charge rises to £3,500, that ongoing charge suddenly looks considerably less attractive.
Higher charges can discourage buyers.
Fewer buyers can put pressure on values.
Lower values then make the service charge represent an even larger percentage of the property’s price.
For investors thinking about their eventual exit strategy, that’s worth taking seriously.
What Should Investors Check?
Before buying any leasehold investment, don’t simply ask what the service charge is today.
Ask:
- What has it been for the last five years?
- What does it actually pay for?
- Are there expensive facilities within the development?
- Is there a healthy reserve or sinking fund?
- Are any major works planned?
- How old are the lifts, roof and mechanical systems?
- Are lenders currently comfortable lending on the development?
- What could realistically happen to the charge over the next decade?
Because the real question isn’t whether a £2,000 service charge works in your spreadsheet today.
It’s whether that £2,000 could become £4,000 or £5,000 in the future.
Final Thoughts
Apartments can make excellent investments, and a reasonable service charge shouldn’t automatically put investors off.
But the days of treating service charges as an insignificant line on a spreadsheet are probably over.
When you’re buying an apartment, you’re not only buying the space behind your front door.
You’re also buying a share of responsibility for the building around it.
And the more complicated, historic or facility-heavy that building is, the more carefully those future costs need to be considered.
A good-looking apartment can still be a poor investment if the building it’s sitting in becomes increasingly expensive to own.
