How developers can manage service charge in residential areas

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

16 February 2020

Over the last two decades, the property market in Kenya has undergone significant transformation. It was in the early 2000s that developers started seriously seeing houses as tradeable commodities. Before that, many were building for renting; then at the turn of the century, more and more built to sell.

Twenty years down the line, many of the buyers who bought homes with finance have now completed paying their loans. As a result, majority have moved out and rented the houses to third parties. Because of this change in the profile of the residents, some of these older estates have deteriorated rapidly due to lack of maintenance, especially in the common areas – corridors, gardens, streets etc.

I think that property developers need to change the maintenance strategy. Currently, buyers are expected to form a management company to which they pay a monthly fee to meet the running costs. Unfortunately, this hasn’t worked very well because many buyers default on these payments and the managing company has no leverage to enforce the collection of fees.

I have looked around and found that for houses priced around Sh5 million, developers are asking for about Sh2,000 per month for a period of about 6 to 12 months. That is, the buyer is asked to pay Sh12,000 to Sh24,000 in order to enjoy managed services for that period.

Now, adding just Sh12,000 to a Sh5 million price tag is a small request; many buyers have no problem paying it. But after the managed service period is over, the estate begins to deteriorate slowly since the collection of the fees is no longer efficient.

Perhaps better way would be to collect the maintenance fees in full at the point of purchase. That is, to include it together with the purchase price. The question is, how much money would that be?

Suppose the developer decides to collect, say 20 years worth of service fees upfront; that comes to Sh480,000. The first question, of course is whether buyers would be willing to add this much (almost 10 per cent more) to the Sh5 million.

That discussion is beyond the scope of this column. For now, we need to answer the simple question of what happens after 20 years are over? Where will more money come from? It turns out that the Sh480,000 would still be available – every cent of it!

If it is deposited an account that pays a modest 5 per cent per annum, the monthly interest earned would be exactly Sh2,000 – exactly what is needed for service fees. Thus, the original Sh480,000 would be left untouched, even after 20 years, it would still be in the account.

How about inflation? Well, the working interest rate of 5 per cent is quite low. Currently, one can easily get 8 per cent without any negotiation. That is, a monthly earning of Sh3,200 – leaving a surplus of Sh1,200 as protection against future inflation.