Why are service charges so high, compared with inflation?

It comes around every year - what will my service charge bill be this year? Has the service charge gone up?

While no one ever wants to see an increase, it is increasingly common with service charges nowadays. But why do they seem to go up faster than the rate of inflation? Let's dive into the main factors that affect service charges compared to the rate of inflation.

What are service charges?

Service charges are funds collected to pay towards communal services. For example, a gardener looking after the shared lawns and hedges needs to be paid, and this usually comes from all of the owners across the estate. They are asked to chip in a proportion towards expenses, and by collecting it all together under one fund, you have your service charge, with an annual budget at the start of the year and accounts at the end.

What is inflation?

Inflation relates to the increase in the general cost of goods and services. Over time, the price of a loaf of bread is likely to go up, leading to an inflated cost. From another perspective, this translates to decreased purchasing power, meaning that £10 will buy you less bread now than it did 20 years ago.

Why do things change at different rates?

Inflation is a national measurement assessing the currency against the cost of purchases. As such, this measures prices after they have changed. Service charges on the other hand, are independent of inflation. While most changes may reflect inflation, practically every service is influenced by other external factors. Here are some examples of key subjects that influence service charge costs:

Recent changes - labour

Many services provided for block and estate management depend on labour, directly or indirectly. For example grounds maintenance and cleaning services are provided based on hours worked, while services like insurance, property management and accounting also factor in staffing costs when calculating fees. Staff costs have increased significantly over the last few years, including increases in Employers National Insurance rates and reduced limits to when those contributions start, as well as surges in National Minimum Wage. In the last 3 years, two of the annual increases have been the highest percentage increase since 2001, reflecting higher living costs but also meaning companies must increase their prices for the same services. The surge over the past 4 years exceed the increase in any previous 6 year period, showing the 50% faster rate of increases in recent years.

Recent changes - energy and fuel

A series of major global changes over recent years have driven up costs of producing electricity, as well as standard fuel. Anything from the Covid-19 pandemic (lockdown and furlough costs), to Brexit and war in Ukraine, have caused issues with trade agreements, supply chains, availability and accessibility. These issues have led to spikes in base costs, and in some cases no supply at all. As a result, contractors that rely on fuels (from cleaners and gardeners travelling to site and using equipment, to electricity companies providing power for lighting or lifts) have seen their costs rise exponentially. In turn, their costs lead to higher prices for consumers, even via the service charge.

Recent changes - insurance

Buildings insurance has seen a huge increase across the country. Insurers typically charge a set rate for cover, for example £1 per £1,000 of cover, but this will be affected by a range of changes. Aside from the effects listed above increasing labour costs to work on site and repair damages, insurers are also picking up the tab for more expensive material costs due to high fuel prices, larger production costs and reduced supply.

Then the more local factors include catastrophes like Grenfell Tower in 2017 (as well as subsequent fires), the cladding crisis throughout the UK (which insurers are protecting against the risk) and increased claims for issues like subsidence, resulting from a changing climate. All of these changes are on top of standard inflation for most elements.

Recent changes - cost of living

Most people are familiar with the cost of living crisis over the last few years. Largely driven by high wage rises stemming from worker shortages, in turn this means businesses must charge more to cover their own costs. While private bills are of course increasing, so too are the costs of running businesses and paying staff, all of which gets passed on to the end user - otherwise the business will eventually fail.

Recent changes - increased regulations

A more positive industry change has been increasing regulation and more legislation in the last few years. This is gradually raising the standards of management, works and services, by ensuring suppliers subscribe to relevant industry bodies and adhere to improved standards. This does however mean that contractors and suppliers must spend more time on internal training and compliance, to ensure awareness and competence. It also means that residents are seeing increased work demands, for example from the Fire Safety (England) Regulations 2022 clarifying greater need for Fire Door Inspections and remedial works. In some cases, the 2021 and 2022 Acts also require clear evidence of building safety risks being properly assessed and managed, which in turn can lead to higher survey costs such as External Wall Surveys, and potentially remedial works as well.

All in all, we are seeing rising costs throughout the industry, both as general wages increase, the country is affected by war or pandemic, and as regulations and requirements increase for contractors and residents. In light of all of this, it may be more important now than ever to ensure each property saves towards a Reserve Fund for future high expenditures, and that they have access to competent and knowledgeable advice, whether through an appointed agent, the Leasehold Advisory Service or an appropriate legal advisor.