Five solutions to stop the need for capping service charges
Reduce and eventually eradicate!
In this blog post, Dan Oehlman shares a series of steps that can be taken to reduce and eventually eradicate the need for capping service charges. See our LinkedIn post about outlining the problem of capping service charges here.
1. Get involved right at the start
There’s no better time to think about the affordability of service charge costs and avoid the need for capping than right at the very start. As service charge professionals, we need to be part of the calculation around the affordability of a development ahead of its acquisition.
There are several things that will help reduce the chances of needing to cap service charges:
Offer your help
Development teams are sometimes measured on the number of units acquired. This measurement can drive an attitude of looking the other way when it comes to the long-term financial impact of a development. By being independent of that, you can look at the service charges more critically. If you’re senior enough to hold some sway, encourage more meaningful and less harmful measures of performance based on longer-term success.
Keep long-term costs low
If a site is acquired or being developed, look wherever possible at ways the long-term costs can be kept low. Design out costs wherever possible; any service charge is to the organisation’s detriment, as well as to the detriment of the resident. Consider robust materials over pretty ones. Think about the longevity of an asset wherever possible.
Build relationships during development
Even when you’re not the freeholder, there are ways to influence service charges. Build your relationships early. Be part of the conversations.
I’m sure you’re thinking, that’s great, but how do we do it for existing developments? Don’t worry, there are ways to impact affordability and therefore, the need for a cap.
2. Forge a new relationship with residents
If you find that affordability of service charges is a problem, then one of the ways by which you can impact that is through building a different type of relationship with your residents.
Unfortunately, our sector has fostered a relationship with its residents which resembles a 1950’s parent-to-child relationship. Whilst this post is not the time to debate how we found ourselves in this situation, we do need to forge a new type of relationship with our residents, and start having adult-to-adult conversations which involve listening and (truly) consulting.
There’s a wealth of opportunities to impact services and therefore their cost. These include:
Deciding whether a service is required
Looking at the frequency of a service
Looking at the scope of a service
Obviously, we’re not advocating the removal of services for health and safety or compliance reasons, but where you have the option, having open and honest conversations with residents can yield significant benefits. I’ve personally used this a number of times and not only is it successful, but it builds trust.
3. Know your contracts
Very few Registered Providers have a good handle on their contracts. Many have contracts which have been allowed to roll on, or have been added to so significantly that they no longer have any resemblance to the original scope. A lack of understanding of what suppliers are doing and poor practice around procurement and contract management means that you can’t take advantage of one of the major tools in your armoury as a large housing provider – the economy of scale.
If you don’t understand your costs, leave contracts rolling, or fail to consider scale as a bargaining chip, you’re missing out on a way to reduce your cost base and therefore reduce the costs to residents.
4. Understand your developments
When it comes to finances, there’s been a fixation in housing on the bottom line. The sector has been able to do that, partly due to rent settlements being sufficient and a booming property market. In the last seven years, this has been eroded by rent reduction, capping and a worsening economy.
It’s time that organisations understand the financial performance of your developments individually, not just collectively. Service charge and rent income vs expenditure, as well as longer-term repair and replacement costs of your asset are vital to understanding the financial health of your development.
Why is this important to reducing the need to cap? Well, understanding each development’s financial health in the long term, does give you some leeway in the short term to adapt. This might even mean that a small cap, which is well communicated and clearly shown in demands would be possible in the very short-term whilst other steps are put in place. You may even have options around asset lifecycle where steps now could increase the life of the assets you have, therefore reducing the impact on residents.
5. The nuclear option
So, you’ve tried all of the above, but whatever you do, the numbers won’t work. What do you do?
It’s probably an unpopular opinion, but if this is the case, this particular development is probably failing to meet your purpose as an organisation. If it’s costing too much, it’s not meeting your purpose to provide low-cost homes and help residents to ‘live well.’ If you’re capping to achieve this purpose, it’s taking money out of the organisation. At this point, organisations need to consider why this is the case and where possible, think about disposing of the asset and reinvesting that money into something that meets your purpose.
These are just some of the options available to you that span your entire organisation. Affordability and service charges are EVERYONE’S problem, but as service charge professionals, you feel the impact more keenly than most. Build relationships, challenge the status quo, and change some minds on service charge capping.
If you have any questions or need help with your service charges, email Dan at hello@ad-esse.com.
