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Why Service Charges Could be Killing Your Property Investments

By Estate Cloud - almost 3 years ago - Kenya

Why Service Charges Could be Killing Your Property Investments

Recent months have seen a good number of properties foreclosed by lenders following a rise in mortgage defaults by owners.

Some of these are investment properties that have failed to turn in profits forcing owners to quit the investment. Most analyses show that property prices in Nairobi are above the ceiling.

The cost of operating investment property in the city has been pumped up by underlying costs, highly inflated land prices and expensive mortgages.

One of the surprisingly high underlying costs is the service charge. This is the amount paid by property owners to the developer or management company to maintain services and utilities in good condition.

In some places, owners agree with the property management company on what the service charge amount should be while in other cases, the amount of service charge is included in the sale agreement and is payable to the developer directly or through the property management company.

According to one user, it costs between 5k- 25k per unit for apartments in high-end areas while in other residential areas it ranges between 7k- 15k per month.

“It depends on the apartments but most of them charge a standard fee for all whether you have a 1-bedroom or a 4-bedroom. I haven’t seen anything less than 14k a month. The most ridiculous one I have seen is in Westlands charging 20k a month for one-bedrooms,” he said.

The cost is usually expected to go up based on the sophistication of available amenities, however, most apartment buildings in mid-markets or higher have lifts, backup power faciliies, a swimming pool, a gym, etc which require maintenance.

“The range in upper mid and upmarket areas is between 10 -20 k, which is ridiculous, considering that's in line with or a little more expensive than HOA fees in a very nice suburb anywhere in the US,” said another user.

“What these service charges mean is that most apartment/homeowners in Nairobi end up being tied to paying 'rent' on houses they've already bought. In my opinion, 5k should be the highest service charge considering the economies of scale at play in those apartments,” he added.

Most agree that 5k- 7k at most would be reasonable for a high-end apartment in a very nice area with 24/7 concierge and security, free utilities like water, a pool, gym and elevators.

They said developers have been allowed to profiteer on properties they’ve already sold by charging exorbitant fees post-purchase, putting pressure on unsuspecting Kenyans who spend their hard-earned money to buy properties.

These additional high costs in addition to high mortgage rates can make it harder for an investor to recover their investments and is to blame for high property prices in some areas.

Read; Why zero-rating low-value property transfers could help markets

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