Service charge: The hidden cost making housing expensive

A private home with a garden. [Getty Images]

The lack of a clear model dictating how service charges are levied is a factor deterring the affordability of housing in Kenya, a case study shows. 

The ability of the developer or landlord in question to have a free hand on how they apply this charge has also been put into question. 

The findings of this project, published last month by the Centre for Affordable Housing Africa (CAHF) and funded by Financial Sector Deepening Kenya (FSD Kenya) points out the opaque nature in which this service is calculated and charged.

As such, many potential homeowners or tenants, do not necessarily factor this cost in mind when seeking a residential place and worry only about the payable monthly mortgage or rent.

This hidden yet open charge, the survey notes, then becomes a significant factor when affordability is discussed.

Just at the beginning of data collection, it is indicated that 14 residential projects were earmarked for a survey around the Nairobi Metropolitan area, which includes interviews.

However, the findings under the title Understanding Service Charges in Kenya’s Housing Market, indicate only four residential projects agreed to provide adequate information.

“This draws attention to the difficulty in accessing publicly available and credible data on housing which would otherwise support investment decision-making for stakeholders in the sector including potential homeowners, developers, and property managers,” reads the findings of the survey.

Data for the survey was collected between February and June 2022.

Service charge encompasses amenities provided by the developer or landlord which normally includes water, security and garbage disposal. In some residential areas, this charge includes electricity, and auxiliary amenities like a swimming pool, gym or recreational area.

The survey notes that data on how this charge is implemented in the sector is key to investors in the sector, particularly those who seek to put their money into affordable housing.

An assessment of the four projects found that the method reached on what amount to charge varies from one developer to the other.

“And is rather haphazard,” the survey reads.

For rental properties, this charge is normally included in the rent. The survey found that this charge is usually 10 per cent of monthly unit charges.

The survey notes that even when the service charge is inscribed in the sale or lease agreement, it may be altered in cases where the developer hands over the property to an independent management company, or from one property manager to another.

The charges can be altered as well when operating costs change and the then collections are not enough to cover the actual (costs), or also when a unit owner or tenant moves out.

“Implementation of these changes demands tenant involvement as it could require a significant adjustment to a household’s housing budget,” the survey reads.

The survey notes that one of the four sampled projects did adjust the service charge by 84 per cent to cater for increased operations costs within the residential property.

“This faced resistance from the tenants noting that the additional charges added an unexpected financial burden that was not provided for in their initial agreements,” the survey notes.

It is added that Kenya’s housing market lacks a body or authority that regulates service charges and as such, determining rates is at the discretion of the developer or property manager.

“This has over the years exposed some tenants to property managers, who impose exorbitant rates for services that are sometimes not rendered,” the survey reads.

“Failure to comply, the tenants could be denied essential services which jeopardise the quality of life.”

In some cases, says the survey, tenants may be denied access to the premises, evicted even if they have paid rent, or their names listed down on a ‘list of shame' that’s publicised within the premises.

Interviews with 14 formal property managers found that one-way service charge is calculated by dividing equally the total project operation cost (inclusive of their mark-up) by the number of units regardless of size or typology.

The same methodology was used by others who instead of dividing the operation cost (and mark-up equally), it was dependent on the size of the unit. For example, a 27 square metre unit is charged less compared to a 72 square metre.

If the project is under construction, the developer will indicate the service charge in the Letter of Offer (LOO) which in some cases would be reviewed once the project is running.

In some ongoing projects, the service charge will not be indicated until the project is done and a property management company is in place.

Some, as it was found out, have a service charge whose computation is not disclosed.

“There exists no standard rationale for deriving serving charges in the Kenya housing market, both legally and as market practice,” the survey states.

It adds: “This exposes tenants to exorbitant charges by some developers or property managers and therefore potential home buyers and tenants must carefully consider terms and conditions stipulated in the sale or lease agreements and especially service charge rates when buying or renting a house.”

The survey notes that service charges are not one-offs and should therefore be financially sustainable for a household.

“Housing affordability is a major challenge in Kenya with the majority of the existing and incoming housing supply, being unaffordable to the median income earners. Adding on other associated costs such as service charges and the cost of utilities continues to fuel unaffordability,” reads the survey.

The survey advises market stakeholders led by the Government to consider the development of a standard way of computing service charges as one way of ensuring the affordable housing agenda succeeds.

“This will not only guide incoming developers but also contribute significantly to the sanity of the housing market and contribute to housing affordability,” the survey concludes.

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