Managing Agents and Housing Associations - Working Together

Hi Everyone

Many of you will be aware of the work we are doing trying to address the issues that Housing Associations have working with Managing Agents and vice versa.

The attached report is the initial draft of a document which will provide the foundation for subsequent work on:

 ·         A New Development checklist (July 2017)

 ·         Final Report (August 2017)

 ·         NLG Good Practice Guide (September 2017)

 ·         Joint Code of Conduct (November 2017)

I hope you can find the time to review the report and give feedback by Friday 4^th August please?

NB - We are looking for the final report to include Case Studies and other examples of existing Good and Poor Practice in this area. What has worked in such relationships and what is the impact when arrangements are particularly bad? Please let me have any such examples which will be helpful in promoting sign up to the final Code of Practice

Happy of course to answer any queries.

Regards

Alan Wake FIRPM and David Clark FIRPM

              

alan@castmediagroup.com

davidclark@mainstaygroup.co.uk

A guide to ensuring the best results for all stakeholders when working on leasehold and multi tenure schemes with Managing Agent and Housing Association input.

Executive Summary

There is no avoiding the fact that Managing agents (MAs) and Housing Associations (HAs) are increasingly working together on multi tenure schemes to deliver service charge management to their respective customers. HAs are often the largest single investor in a scheme and see MAs as a 'one size fits all' approach to a complex problem.

Often the MA will have overarching responsibility for the collection and expenditure of the service charges in accordance with statutory and regulatory requirements. HAs will either pass these costs on to their customers or make payment themselves. The cost of service charges for HAs is significant with many HAs now paying out £millions per annum in variable residential service charges and variable estate rent charges.

Too often there has been little communication between those who will directly manage the properties and no training or understanding of how these charges arise. The first communication is therefore a MA chasing payment or the HA asking for detail.

MAs cannot operate effective management without prompt payment of what is often a large proportion of the service charge contribution. HAs cannot pass these charges on to their customers or accounts teams effectively without a detailed understanding of how they arise. Service charges need to demonstrably represent value for both parties.

This report aims to pull together the thoughts of both parties and come up with some helpful pointers to working together to improve outcomes. Typically, the issues outlined in this paper will tend to occur on larger and more complex developments, but understanding them will improve relationships at every level and on all types of mixed tenure development.

The need to work together

Managing agents have been managing service charges for many years but have poor understanding of the aims and purpose of HAs. They simply carry on doing it “by the book” which can mean they will chase hard when there are outstanding charges.

HAs though, do not necessarily pass on service charge information to their customers who want to understand what it is they are paying for. There is also a disconnection in both organisations between property managers delivering frontline services and those in development departments doing the initial deals.

However it is clear that MAs and HAs are working together on many thousands of schemes ranging from small housing developments through to multi tenure mixed use schemes with many hundreds of units and a high degree of complexity.

There is willingness and an opportunity for both sides to work more closely, to benefit greatly themselves and to importantly improve services to customers. HAs have also become significant developers of new housing stock of all tenures. They can be profitable customers and allies for MAs.

·         Double charging

Managing agents charge a management fee, normally on a per unit per annum basis (questionable use of a percentage of expenditure does occasional resurface but is thankfully rare and is definitely contrary to RICS and ARMA guidance). This fee can start to look unreasonable when the HA is also recovering a management fee or admin fee from its customers. HAs need to be there at the outset when these fees are being agreed.

Managing agents need to ensure that they do not load all of their management fee onto, for example, the estate charges, when there are also heads of charge for blocks and parking. The net result of this is that the HA receives a charge that does not allow for the fact that they are managing the common areas of their own block. Management fees need to be allocated to each expenditure head to ensure fairness at every level and reduce the possibility of double charging. This requires good use of service charge schedules and careful drafting of lease terms.

There is some further useful comment on these issues within RICS Guide to Managing Mixed Use Developments.

·         RMCs and HAs

Residents' Management Companies (RMCs) allow developers to pass the responsibility for service charge management to a company whose members are fundamentally the leaseholders. This is a perennial problem for HAs who often hold head leases but in some cases are only granted one vote or who grant leases and have a vote for each, allowing them to control the RMC with potential for confusion and friction. Very careful consideration needs to be given to this element of the corporate set up. Conversely, HAs must engage with RMCs and not take a back seat.

If the HA is purchasing a significant number of dwellings does it make more sense for HA to be appointed manager within the lease or to take a headlease of the whole estate? Or should the HA consider taking informed control of the RMC?

·         Education

There is a requirement to ensure that HA customers are advised in detail about how charges will arise and be recharged. The more information on how charges are derived and how the lease allows for recovery should be provided by the MA and shared by the HA. Service charges can be complicated and the associated services opaque. There is a duty on all parties to ensure absolute transparency and plenty of advice and education in their delivery.

By way of example, Average service charges on new build in London now exceed £2,700 per unit. This means that an average wage earner will be paying around 10% of their pre-tax income contributing to services that remain largely invisible. (Guardian Money March 2016)  It is essential that MAs and HAs combine their services to ensure that customers receive high quality information about how services are paid for and delivered and how they benefit the asset value and the community.

Development departments need to understand the relationship between good design and management costs.

Collaboration and partnership

·         Understanding each other's position

Too often the relationship starts when the first demands for service charges are sent to the HA by the MA. Often this will be a demand for each and every lease held by the Association. Modern leases normally demand in advance so the charge can often be significant and prior to receiving any services.

In order to avoid misunderstandings there needs to be a constructive discussion prior to completion so that each party has clear lines of communication and details of how costs are decided and collected are both understood and agreed. It is not unreasonable to provide a summary of the costs in advance and to total the demand for the period. However this requires an agreement to work closely together at the outset.

·         Have senior level interaction

Managers and directors need to set the standard. This requires discussions agreeing what is to be reasonably expected.

For example: MAs should not load all of their fee onto estate charges if these are the only charges met by the HA or its' leaseholders. Charges can reasonably be split between different schedules. Building charges and estate charges should share appropriate proportions of the management fee - thus avoiding double charging when the HA add their fee for managing the building.

·         Working together, joint approaches, partnership, collaboration

Developers really want this too. The best managed schemes are notably partnerships between the main stakeholders. Collaborative approaches deliver much better outcomes and protect and enhance asset values which in turn benefits the community.

·         Training at handover

Generally MAs will be happy to meet with HAs and provide some basic understandings of the specific construction of service charges on a scheme and how this links in to the leases and collection of funds.

Starting early

·         Be in the room!

Developers generally want an early exit. They will set the service charge with a managing agent that allows them to sell units, minimise their voids contribution and exit smoothly. This will not necessarily always be in the interests of the HA or Good Practice. Solicitors for the developer will set up a corporate structure that allows easy handover to an RMC and/or a potential sale of the reversionary interest.

Does this represent an opportunity for the HA? Developers generally want rid of the freehold and want to sell affordable units – why not make it a package deal (subject to available funds)?

What are the HA rights to be? Will the HA be shareholders and/or directors of a RMC? How will your vote or votes be allocated? Will the freehold be sold without your consent, what is the ground rent clause - does it create a future issue?

Is the scheme manageable cost effectively? Does the HA really want 24/7 concierge services for example? Are the proposed systems the most cost effective in the long term? Are the replacement costs and life spans of plant reasonable? Who has the responsibility for insurance - does it sit with the landlord or with a RMC?

·         Bring your experts to the table

If you are investing in a significant number of units then be at the table to influence the lease terms, the corporate structure and the service charges and to maximise opportunities. This means coming to pre sales meetings with your experts, including your lawyer and property manager.

·         Understand what outcome you desire

What do you anticipate to be a fair and reasonable level of charges? Work closely with the managing agent to achieve this. If there are to be separate blocks/entrances is there a costs benefit to delivering services internally or will you benefit from any economies of scale delivered by the MA?

·         Work with any appointed MA.

It is likely that they have experience of setting up management services with the developer and will welcome your input and make adjustments and offer advice. The future success of the scheme is, at least in part, dependent on this relationship.

Leases, corporate structures and voting rights

·         Must suit all parties - RMCs, headleases, commercial elements, Special Purpose Vehicles etc., can all lead to complex corporate structures that will impact how you can interact with the overarching development plan.

·         RMC or no RMC - who shoulders the risk? Is this an opportunity being missed by HAs? RMCs give leaseholders control of budgets and of how management is undertaken but it can be difficult to find directors without a degree of compulsion. Will the RMC properly represent all occupiers including fair rented and private rented tenants and shared owners? In multi tenure schemes will all parties have a balanced influence?

·         Residents' Association - Consider not having a RMC where this is likely to create risks as above or where a golden vote will allow one party to overrule any decision. Residents' Associations can be formally granted by the landlord to give all parties a fair right to consultation and transparency.

·         Voting Rights - one size does not fit all. Where there are HA customers and the HA takes a headlease to a specific block it is quite possible that they will have sufficient voting rights to overrule any decision of the RMC on the broader scheme. Understandably MAs will look to avoid the creation of such voting rights although this can avoid inertia and issues such as a lack of volunteer directors. Certainly it is worth a discussion between the parties at the outset..

In complex schemes service charges can be a significant element of disposable income and clear informative advice on service charge structures, budget management and ongoing controls need to be clear for purchasers. For new purchasers, avoiding cost rises in early years requires an honest appraisal of the management costs from the outset. It is important for parties to recognise and discuss 'commercial challenges' particularly around the point of sale.

Service charge heads and allocation

·         Understanding the matrix and the schedules is key.

How are the charges to be split? Is there an equal estate charge? Are the units split by floor area? What does the lease say? What will be easiest to explain to leaseholders and what is equitable? It is very difficult to row back from the position created once the service charge matrix is completed - one party will always be disadvantaged.

If the matrix is not fixed within the lease there is always potential for challenge and the F-tT imposing alternative apportionments. Juggling certainty with flexibility, to take account of things changing in the longer term, is a delicate balance. This can be particularly tricky where the development also includes commercial units.

·         Why do we contribute to some things and not others? Who decides?

Generally the managing agent will work with the developers' lawyers to come up with a service charge framework that is as equitable as possible for all parties. This means ensuring that everyone makes a contribution to those services from which they will benefit. These will normally be wrapped up in an estate charge that will be apportioned in accordance with the agreed percentages in each lease. There may be charges made equally - such as a parking charge to those with a space. There may be charges for those that benefit from communal services. These may be apportioned in a way that reflects the availability and amount of benefit received (3 pronged - Availability benefit and use is a common expression in case law and particularly within commercial leases). The opportunity for creating complexity is myriad and unless HAs are at the table when these decisions are made they will be stuck with them and probably will never fully understand them.

·         Avoiding complexity

Creating a service charge matrix and budget can be a balancing act between over complexity and the creation of a fair allocation of costs. Simplicity is always easier to explain but there are many mixed schemes running with 20 plus heads of charge and significantly more line items.

·         Understanding Heads

Service charges on complex blocks can have several schedules for example:

o   Estate Charges - All parties including commercial tenants and houses are likely to contribute

o   Buildings Charges, internal - those leasing units in managed buildings on the estate will contribute if they use the internal common areas

o   Buildings charges, external - all building users including those such as commercial using their own entrance

o   Parking Charges - those with the benefit of parking only

o   Staff costs - who benefits from onsite staffing?

o   Commercial units - don’t benefit from much of the internal buildings charges but may cause more wear and tear to the estate as a whole

o   Insurances

There can be many others where costs are allocated to those who have availability, benefit and use. Understanding how the service charge is created and allocated is key to understanding how charges arise.

·         Capped charges

Capped charges are unusual but not uncommon in some regions and still surface from time to time as part of the planning requirement. Effectively this can result in the wider community subsidising the service charges for HA customers in perpetuity. A clear message around this needs to be agreed in advance and lease terms need to be very explicit about recovering additional costs from the wider community.

·         Voids collection policy

It is essential that there is an agreed voids policy. Where units are completed but unsold charges will arise. Developers often agree how void charges will arise and when they will be paid, whether they will include sinking fund costs and how they will be recovered - particularly where a lease has yet to be granted.

Demanding Service Charges

·         Understanding demand requirements

Demands are raised in accordance with the lease. There is no alternative available without undermining the ability to ensure collection of essential funds. This means that you will get a demand for service charge for each and every lease granted unless you agree sensible alternatives. Whilst individual demands may be a requirement to meet lease terms, no one is barred from creating a summary invoice where required and MAs should take a pragmatic role to assist the HA in collecting from their customers.

·         MAs understanding HAs requirement for simplicity

Nothing is less likely to meet with prompt payment than a pile of unexplained demands for 6 months service charge money up front! MAs must work with HAs to agree appropriate and sensible ways of billing. Whilst it is unusual to step outside of the lease terms (this risks collection of bad debts), there is nothing to stop payment in advance followed by monthly instalments by standing order. It requires a dialogue between the parties.

·       

           Service charge funding is critical

MAs cannot always wait for service charges to be paid in the next payment run. The terms of payment are dictated by the leases and these are designed to ensure that services can run smoothly on a day to day basis. All service charge monies are ring fenced in trust for the particular scheme/schedule. MAs cannot commit expenditure until and unless adequate funds are available for the scheme.

Where HAs are passing on the charges for recovery from leaseholders or shared owners then the delay may prove critical for funding:

o   Is there a requirement for the HA to fund charges up front?

o   Can the MA deliver demands earlier?

o   Can demands be made directly to leaseholders by MA?

o   Is it appropriate to share that information with the MA?

o   What are the credit control arrangements for late payers?

Payment for major items, such as insurances and annual contracts benefit from single payments rather than periodic. Cash requirements are not generally smooth. Consequently failure to pay service charges on demand can result in higher costs or cessation of critical services. Generally the HA has an important role in ensuring the smooth running of a scheme since they often have the most units. Lease terms commonly provide for annual or half yearly payments to ensure funds are available at the start of the year. This is in contrast to the typical HA leases / procedures of collecting service charges monthly and HAs often need to understand how they are going to forward fund when offering their own tenants more generous payment terms.

MAs need to be aware that generally HAs are happy to pay, often funding the charges themselves prior to collection from their customers.

·         S.20 consultation

Under the Landlord and Tenant Act 1985 (as amended by S151 of the Commonhold and Leasehold Reform Act 2002) Landlords must consult over qualifying works and long term agreements. This is an essential tenet of residential leasehold management and it is important that parties to a lease understand the importance of consultation and reading and responding appropriately. Details can be found here: http://www.lease-advice.org/advice-guide/section-20-consultation-for-private-landlords-resident-management-companies-and-their-agents/

Since that guidance was written, the upper Tribunal has determined, in the case of Leaseholders of Foundling Court and O’Donnell Court v London borough of Camden, Allied London (Brunswick) Limited and others [2016] UKUT 0366 (LC), that it is for the party which is originating the works to consult with the party who is ultimately responsible for payment of the service charge.

This will most commonly mean that the MA will need to consult with the HA’s service charge payers as well as with the HA themselves. This presents practical difficulties for the MA who is unlikely to have any direct contact with the HA’s sub-tenants and most likely will not even know who they are. The Upper Tribunal suggested that the most appropriate practical solution is for the MA (on behalf of the superior landlord) to request the information be provided by the HA (as intermediate landlord). If the HA  does not assist it may face difficulties in recovering contributions in excess of the triviality threshold (£250 or £100 p.a.) from its own tenants even though its own contributions may not be capped at that level.

Both parties therefore, need to work together to ensure that all tenants are fully consulted and all observations/nominations are received, and had regard to, by the party originating the works.

Communication

Agree lines of communications - Each party should establish named individuals with whom they can discuss processes and iron out problems.

That means finance teams and property managers on both sides need to have a dialogue.

People come and go - there needs to be processes to ensure that lines of communication remain open.

Most of all, both parties need to demonstrate accountability, transparency and good governance. These things only come by regular communication and agreed processes.

Use technology - the increasing use of portals, social media and texting give us new ways to communicate messages to our customers.

There is evidence of success in larger organisations when HAs and MAs have appointed specialist officers to deal solely with the other party on all MA/HA issues. Of course this needs a certain level of scale.

Conclusion

·         Managing agents and housing associations generally want the same thing - to deliver excellent value for money services to their customers

·         HAs must be in the room to influence the developer and the managing agent

·         Agree other avenues of engagement and processes and communicate regularly

·         The development department must talk to management department when looking to invest in large schemes - cost of management must be factored in to appraisals

·         Be pragmatic and flexible but ensure a fair deal for your customers

·         Build trust and look to create real lasting partnerships

·         Information is key

This is a growing opportunity for both parties - not a threat. HAs are growing and a significant proportion of that growth will be through leasehold flats and freehold houses with an estate charge. This represents an opportunity for those managing agents prepared to work closely with HAs, and for HAs who are prepared to put time in to ensuring that their investment is properly considered by the MA and the developer from the outset.

MAs are much more likely to be the developer moving forward and where they are not managing themselves they need to make informed decisions about the MAs that they engage.

Thanks to Alan Wake, Jeff Platt, Caroline Millington, Abbie Gregory, Graham Bennet and others who have lent a hand along the way including LEASE who held the initial roundtable discussions that led to this paper.

Definitions:

HAs - Housing Associations, Social Landlords and any charitable provider of low cost housing

MAs - Managing Agents, generally in the private sector who specialise in collection of service charges for long leasehold properties or estate charges on freehold houses with common areas.

RMC - Residents' Management Company

TA - Tenants' Association

F-tT - First-tier Tribunal

Reversionary Interest - An interest in the freehold or head leasehold held by a landlord that crystalises on the expiration of a lease or leases. Normally this will generate an annual rent or ground rent.

Other Useful documents/websites:

ARMA Guide to working on mixed tenure developments - www.arma.org.uk

Lease Guide to S.20 Consultation for Private Landlords, RMCs and their Agents www.lease-advice.gov.uk

 RICS Guide to Managing Mixed Use Developments 1st Edition 2012. www.rics.org.uk

www.irpm.org.uk

What Three Words?

Technology still has the power to add efficiency and improve the 'right first time' delivery of property management services. I am always on the look out for interesting new innovation and the latest find is an app called What3Words.

Pumps at table.forest.sense

Essentially this simple idea splits the world into trillions of three metre squares that are allocated a unique, random three word description. In any language.

Suddenly accurate postal delivery services are available worldwide, accurate locations for people, assets and basically anything is easily possible. It has massive implications for countries that don't have effective addressing systems and is already making an impact in paces like Brazil and Mongolia.

More locally I think it could have great implications for property management. Imaging being able to ensure that the engineer goes straight to the right piece of engineering, via the correct entrance in your massive and complex building.

Imagine as well being able to find you car easily, find your friends at a concert, send a distress signal from the middle of the ocean and so on. For property asset managers I think this app could prove invaluable.

Have a look at http://what3words.com/ 

My Residential Management Predictions for 2016

Belated Happy New Year to all, I think it is going to be a very exciting one.

Now amazingly in its 5th year, this is my prediction of what is going to be important for residential property managers in the coming year. Some themes just keep recurring and residential management is set for unprecedented changes. This is my take on those recurrent themes:

1. Are we training our teams to manage yesterday’s model? This was the theme of the IRPM Fellow's Day late last year. It remains an important current theme. Things are changing. Better value, retention and reputation comes from doing a good job that focuses on the tenant (read customer) and not just the client. We have been training property managers to act solely in accordance with the lease and prevailing statute but ignoring the softer skills that are needed for a new world of consumer confidence, education and social media. New managers are very different animals in 2016.
2. Service and customer focused residential asset managers - not just 'block managers' but experts in a much wider field that takes in communities, placemaking and customer care whilst understanding the built environment sufficiently to add value to residential assets at all levels. In a market where high quality rental environments are likely to become a real alternative option, competing to have the best managed most attractive properties with real kerb appeal becomes an necessity. 
3. Institutional PRS - purpose built to rent. Try as I might I cannot get the numbers to stack up, particularly given interest rates will only go one way and margins for retailing long leases remain fairly strong. However, the evidence remains overwhelmingly against me and this year is the year that will prove the genuine interest that is out there is not all talk. Expect rents to be the highest you've seen. If the model does work then we will see real large scale investment - but it needs a few more years to prove itself and there are other obvious factors at play. Housing Associations will probably lead the way outside London. 
4. The rise of the Housing Association in the private sector - as above. The world of the social landlord is being shaken up, no more automatic rent increases, fewer S.106 opportunities for starter homes, less subsidy. I anticipate more HAs stating that 'we are providers of housing - in any form that takes' not 'we are providers of social housing'. Is it now their aim to assist in meeting the annual housing shortfall by any means?  Let's not forget, top 50 providers aside, the average number of new homes HAs develop each year is around 15.... Social rented property is potentially declining whilst property for private rental is increasing. Their model is being forced through very significant changes.
5. Partnership - always one of my favourite themes - expect to hear more about how managing agents and housing associations can better work together on mixed tenure developments. Meetings are taking place. The word 'partnership' will be used alot... sadly, we remain mired in suspicion of eachother (we need to grow up) so alot of hard work is still needed.
6. The rise of mixed tenure - this is ongoing but continuing from last year, there will be much talk of truly integrating communities and making them work for social and private renters, owners, part owners and families who are inevitably springing up as a new factor in flats - people simply cannot afford to move on. Expect the demise of signs saying 'No Ball Games'. ..Expect practical steps to get communities talking and working together. Expect managing agents to have an important role in this.
7. CHP - a new local way to power schemes with built in savings....lots of schemes will push the green button on their big plants. Fingers crossed! The Heat Network (Metering and Billing) Regulations 2014 will begin to impact how we measure supply and pass on costs, I suspect many are not yet geared up for this complicated piece of regulation. 
8. Over here... - Here come the big multi-family providers from the US. And their trade association, the NAA.
9. A different model - the rise of the new style agents. Those who now put customers at the centre of their operations and add proper value will surge ahead. The US model will (if not already) change the way managers behave. More importantly it will affect landlords and what they offer and how they chose to manage.
10. ARMA Q - it really does have teeth - expect to see them bared in 2016. It also is becoming  a common requirement in tenders that I see. No, I dont know who the new CEO of ARMA is, best kept secret in the leakiest industry ever.

We managing agents still underestimate and undersell ourselves.  It takes experience, time and constant training to deliver a good professional service and we sometimes dismiss how important our role in building communities is.  A modern development may contain every type of tenure and we need to understand the practicalities of dealing with every one of them.  Our service needs to reflect that but also incorporate the same level of service for all - not just for our clients.  We need to anticipate the way the market is changing and adapt for the future, not just react when the change has taken place. Those who have adopted portfolio and asset management skills, learnt to be customer focused and efficient in response will be ready for new and very high standards that will be set by the PRS suppliers who succeed. 

The new players in our sector include HAs, who are now delivering in the PRS, qualifying for IRPM in leasehold and joining ARMA. U.S. multi-family specialists will build and manage to a standard that we must aspire to match or beat. Institutional investors who are currently putting countless millions in residential assets will require exceptionally skilled residential asset managers. Most of all, residential managing agents need to learn and adopt best practice from the new players in our markets and adapt or quickly be left behind. 

Residential Management is changing fast.

Late last year I was invited to the grand opening of a large retirement village in the Midlands. We all imagine we know what retirement living might be like in our minds and perhaps we allow this to colour our opinion sometimes. I must admit to thinking I knew what to expect. I couldn't have been further from the truth.

Firstly the quality of the accommodation and the luxurious feel to the common areas far surpassed that of most blocks I have seen recently. There were marble floors, high spec. reception facilities and an excellent cafe, bar, gym and hairdresser.

I was taken on the grand tour by a resident. She told me of the fears she had before moving in and how these had all proved to be false. She talked enthusiastically about the gym and about how her fitness and mobility had improved so much since arriving. She told me of the sense of community and the pride taken by residents and of many new friends.

Standing under the giant atrium lights the CEO of the housing association responsible told me that there was a mix of owners, shared owners and renters, many paying more the £5k per year service charges. The flats were fully occupied within a few months. He pointed out the benefits to local businesses that ran the hairdresser, gym and cafe. He reminded me that 25% of the population would be over 70 in ten years time and that this type of accommodation was important and represented a huge opportunity - particularly if we could overcome some of the irrational local resistance they had unexpectedly faced.

The scheme is managed almost entirely on site with its own office and full time staff. Families come and go and if it was not for the wheelchair access doors and wider corridors you would never know that this facility was aimed entirely at the over 55s.

Like all new developments the concerns of those that had them were the typical concerns we see everywhere, parking, broadband, noise and a recently cancelled local bus route. Unlike most developments the community spirit and interest in the development was tangible.

Go and see a new retirement village and be as pleasantly surprised as I was. Both these and institutional PRS are going to change the way that we design, build and manage communities of the future. Who says we don't do community? Who says that management isn't collaborative? In the United States this type of development has been around for more than 30 years and we laughed at their "Sunshine" condos. Is it now time to take notice? Can we learn from them?

first published in RPM Jan 2015

Why is management so important when creating communities?

We rarely stop and think about the impact that we as property managers have on the environment and on the communities who live in the schemes we manage. But if we take some time to think about what our developments would look like with just a year without management. Grounds would be completely overgrown, lifts and other services would have been switched off and/or vandalised. Payments of charges would all but cease and the appearance of just about every aspect of the schemes would devalue the asset considerably. Behaviours of occupants would change significantly too. It quickly becomes obvious that far from being the irritant that managing agents are sometimes seen as, we are in fact essential to the feel and the quality of the built environment and this in turn has an effect on the well being of the communities that live there.

Terms such as 'placemaking' are often attributed to design and build inputs at the outset and this is an important element. But it must also includes how managing agents keep their schemes looking good and feeling safe and inclusive, and how they bring neighbours together with a common purpose.

Increasingly the mixture of tenure types challenges how managing agents interact and deliver services to a wide range of the community, some of whom will have very different needs and ambitions for their living environments. All such challenges will need to be met by sophisticated solutions. Some of these solutions will be achieved by bringing the whole community into the discussion and others by a combination of soft and hard services that allow the collection of funds and maintenance of the quality of the environment. As ever this is a complex role that we property managers have been doing instinctively for a long time but subtle changes mean that we must begin regard ourselves as important factors in the delivery of wider well-being of our customers.

What is this change? New schemes may routinely include leasehold and shared ownership, market rented, fair rented and social rented tenancies. Price pressures will see shared renters next door to families and older people trading down living next door to young professionals, key workers or those previously in housing need. In such mixed communities there is a new responsibility for the managing agent and that is to listen to the needs of all and ensure there is a continuous and community wide discussion taking place. This includes allowing full representation of different groups and engaging with community leaders. Allowing collective action gives managers the power and support to make changes and improvements significantly more efficiently.

As an industry we remain bogged down in technical jargon, regulation and limited working patterns and defensive behaviours that curtail the real improvements that we are able to bring. Whilst continuing to recognise the importance of the safety and technical elements of our role, we need to embrace the wider opportunity to be the hub around which communities, particularly in large developments, can control and bring continuous improvement to their environment.

What an opportunity that must represent to further our importance as the experts in the residential built environment.

My Predictions for 2015

Now in it's legendary 4th year and fashionably late.

Did I get 2014 right? Did I lose 10Kgs? Well yes and then no. It went. It came back.

As for the other predictions I think I got some right and some wrong as ever. Who could have predicted that Law and Lease blog winning a prize at the NOTB Resi Awards? Well deserved I think. I am going to enter this year. I love prizes.

More than 11,000 independent views of my blog now and only 65 comments. My first prediction therefore is that I am going to have to be much more controversial.

1. I am going to be much more controversial.

I predict forests in the sky. Not.

2. ARMA Q is live. I am predicting that it has been a success in terms of the numbers signing up - follow ARMA's Twitter feed if you want to hear who is through the stiff requirements so far. Next stage will be to demonstrate that it has teeth.

3. Reducing energy costs. This is good news for those of us that work in a one year contract market and for our customers. Real savings in gas supplies are only slowly feeding through now. Who knows what this will mean for biomass costs?

4. CMA. Carry on as before.

5. The rise of PRS at last....no really. Look out for genuine attempts to deliver a fully integrated management service.

6. LKP will this year become a real force for leasehold advocacy and generally a force for good. Their opinions have become more balanced and measured - they have real influence and this must be used with care if they are to influence the future of the sector. We should all embrace them.

7. The appointment of Roger Southam to chair LEASE is bound to be controversial. Roger has strong opinions and will undoubtedly shake things up - he knows property management inside out. He is a genuine consumer champion and should be welcomed as a breath of fresh air.

6. After a couple of years, where no one really knew if they were behaving correctly in accordance with S.20, I predict a year of quiet reflection and a return to the old fashioned values pre Phillips v Francis. Actually that's nonsense, I expect the next new thing to be [fill in your own concern here]. (Mine is fees for underletting, I am still unclear as to what is reasonable. I am personally being charged annually for a letting that is holding over on the initial terms. Can that be right? Proxima would suggest not.) 

7. Deflation - could it happen? All the pointers are there.... 3-4 years of low oil prices to come, decreasing demand for goods from ageing population, historically low interest rates, supermarket price wars etc. etc.

8. House prices could go down or remain stubbornly static. No-one is going to get any meaningful capital growth and service costs continue to rise on complex schemes. There is a reckoning coming and it will have a big impact across the sector. As ever London will lead.

9. Insurance costs for leaseholders continue to rise and flooding of leasehold flats will remain outside the government's Flood Re arrangements - they still see block costs as a commercial insurance risk.

10. No one imminently is revisiting S.20 thresholds despite many voices asking for a review. Expect more and more requests for dispensation under S.20za.

11. IRPM will make some important announcements at their annual seminar. They will have some great speakers too and I will be lucky enough to speak (for the one and only time) in the round theatre of the Royal Institution where both Faraday and that smiley chap from D:Ream have spoken.

Errr, and that's it really. Another year flies by and the new one is now well underway. I would like to express more optimism but the economics do worry me greatly. Residential managers continue to do a brilliant and entirely necessary job in increasingly complex and pressurised environments,  keeping us safe secure and watertight in our homes. They really need a big hoorah! from time to time.

Response to The OFT's Residential Management Scoping Document

I am writing this open letter in response to the OFT's scoping document in relation to their proposed study of the residential management market. I write in my capacity as a leasehold management expert and property manager with over 25 years experience, and as a leasehold flat owner for more than 15 years.

For the purposes of this response I have restricted my comments to the leasehold market, but I believe it should be noted that similar issues occur with estate management and freehold rent charges - a market which remains almost entirely unregulated and without redress mechanisms.  This area is, potentially, growing faster in the UK than any other sector since local authorities have moved away from adopting public open spaces.

Any study must recognise that the residential leasehold management industry is bound by significant statute and regulations that offer a range of remedies and protections for consumers. Since 1985 successive governments have sought to overcome perceived inequities in the balance of power between landlords and leaseholders with a succession of poorly drafted Acts. These have offered some real protections but have also added to complexity and reduced consumer understanding of this type of tenure further.

Such changes have not entirely removed the rogues. They have been able to use this complexity to prevaricate and delay any response to genuine consumer complaints by using the tribunal and court systems and inevitable loopholes. It has, however, forced the responsible agents to look to professionalise and systemise their services to reduce risk and improve delivery.  Professionalisation has come in the form of specific qualifications (IRPM) and guidance notes and education provided by the likes of ARMA, LEASE and IRPM. None of this was available just 15 years ago. The standard of service delivery is higher than it has ever been and there is a recognition that expertise, diligence and compliance does result in the delivery of better services.

All of this comes at a price, but I estimate that the average management fee for full block management services is at an all time low in real terms. In 1988 I recall reviewing management fees for central London mansion blocks to £225 per unit per annum (ex VAT). Anecdotally and through recent tender exercises these fees remain at the same level or thereabouts. Outside London, fees average £160 per unit per annum and this number has been moving down for some years as a consequence of keen market competition during the recession which was marked by a raft of new players entering the market. There remains no real barrier to entry in this sector and this will remain unchanged without some form of  regulation that has the backing of statute. 

In all, it is not easily possible to manage profitably at these numbers given the demands that complying with Acts and regulations requires. Most agents supplement their incomes by involvement in a range of other activities, whether lettings, credit control, resales, health and safety, surveying services or self delivery of other building services. Without those, leasehold block management is increasingly marginal and many smaller businesses are barely profitable, or worse they continue to trade whilst technically insolvent.

The good news for consumers is that all agents are now required to be members of a redress scheme. If they are involved in any form of insurance mediation they must be FCA accredited. Around half of agents are members of ARMA and bound by their code of practice, the RICS code for residential management and their requirements for PI insurance and trust banking. ARMA is growing rapidly and despite the imminent arrival of ARMA-Q regulation which has significant cost implications for agents. Nearly 3000 individuals have qualified for membership of IRPM and so far more than 300 of these have gone on to become RICS associates. Consideration of statutory backing and a requirement for all leasehold managers to sign up to ARMA-Q would level the playing field and ensure a better consistency of standards.

Notwithstanding, many consumers continue to believe that they get a raw deal. This is, in part, due to a lack of understanding and information at the point of purchase. Leases are complex documents that need to be explained carefully. They are legally binding contracts relating to one of the biggest investments that most people will make. Despite this, they remain barely understood in a world where conveyancing has become a price driven, factory activity and insufficient time is given to explaining the covenants and duties set out in the leasehold documents either by sales agents or lawyers.

I do not believe that the scope of such an investigation can be complete whilst excluding registered social landlords and local authorities. Why would they be excluded? They manage leasehold buildings and there are many well publicised examples of the issues they have had to deal with.

It should be recognised that the services provided to close to 2 million leasehold flats in England and Wales are essential and require highly specialist knowledge across a broad range of subjects. It is not a job for amateurs and it is not easy to find train and retain expert staff in a market that is being reduced to a price driven commodity service. Those that are ARMA members and intend to be regulated through ARMA_Q now find themselves in a two tier market with those who choose to remain unregulated and often non compliant.

Finally it is worth considering that many of the buildings completed within the last urban residential development boom are now reaching the stage that major cyclical projects are becoming due. In too many cases cost pressure has resulted in inadequate reserve provision being made and this will result in further pressure on managers to find quick fixes and cut corners. These buildings are the most complex buildings ever used as homes and the costs of maintaining them in the longer term will be enormous. 

In summary then:

•  The scope must give consideration to the myriad of legislation and regulation that encompasses the very wide range of activities required of a manager for even the most basic of buildings.

• Consideration should be given to whether the current legal and regulatory framework is assisting or hindering the delivery of effective, value for money, services and whether simplification and consolidation would benefit all. 
• The study should investigate whether there is currently significantly more consumer driven switching than ever, as a result of both the increase in self governing Residents' Management Companies and successful Right to Manage applications. Is the market already fixing itself?
• The scope should include an investigation into the current Section 20 consultation thresholds and whether these remain realistic.
• The scope should investigate whether limiting contracts to one year (without more detailed consultation) is ensuring that best value can be easily achieved.

• The scope should recognise the increasingly professional service offered by managing agents.
• It should recognise the importance of IRPM and portable professional qualifications.
• It should look at whether sufficient training resource is available to consumers, particularly directors of residents' management companies and officers of tenants' associations.

•  The scope should allow for investigation of pricing and whether good agents are being driven out of the market,
• There is currently significant tension between consumer requirements for exceptional customer service and value for money.

• The likely impact of ARMA-Q regulation must form an important part of the scope of this study.
• The study should review whether an element of compulsion should be added to ARMA-Q to ensure that all agents are required to join so that all consumers benefit from its provisions.

• The study must recognise that consumers are rarely willing purchasers of management services at the point of sale - hence there is an immediate tension when the first service charge demands are received.
• Intermediaries  - lawyers, conveyancers, developers and estate agents -  have a responsibility to explain the real costs of management services over the life of a lease.
• The continued practice of 'lowballing' service costs at initial sale should be looked at carefully. 

• RSLs and local authority leasehold customers have the same right to be included in the scope of this study as those in the private sector.

• The study should recognise the essential,valuable and important nature of the work that managing agents undertake.

Yours Faithfully

 David Clark FIRPM AssocRICS

NB: The findings of the study into Scottish Property Managers were:

• competition in this market was not working well for consumers
• the level of switching was very low and that consumers often did not understand their rights and obligations, and did not have a clear understanding of the standards they expect from a property manager
• when things go wrong, there was no effective redress mechanism.

The same cannot be said of the market in England and Wales where there is significant competition,where switching is becoming increasingly normal and where there are effective redress mechanisms in the form of ombudsmen and tribunals.

Build to Rent Developments still need Managing

Finally, after years of talk, and long after the term ‘build-to-rent’ became an accepted part of the industry parlance, there is evidence of real schemes coming through planning and of real investment in this asset class from private sector funds.

The new activity is a reflection the increasing numbers of people who are choosing to rent because they prefer to be mobile or cannot see any benefits in ownership or they simply cannot afford to buy. In the Southeast this is magnified sharply and plans for large schemes run to many thousands of units already. But these new renters are not prepared to accept the mediocrity that pervades much of the existing market outside of the social rented sector. Private landlords do not generally have the scale that allows for investment and upgrading of existing stock and units are often disparate and not part of a unitary strategy.

The private rented sector has the opportunity to offer much higher quality products, to add in services and to create longer term communities with people who want to stay put. In the USA and most of the rest of Europe this has long been the norm.

I have not, however, seen any evidence of real management strategies. When looking through the plans for new build-to-rent developments there is scant information on how the assets are to be maintained and enhanced over time in a cost effective way. There is a danger that many of the same mistakes will be made as were made in the last urban regeneration boom.  Developers are still learning from mistakes made in the early days of the leasehold flat resurgence in the 90s. The issues will remain the same with build to rent, but I suspect that institutional investors will be keener to understand the true returns after the real cost of managing complex buildings is factored in.

New large schemes will temper the market, add variety and drive up the quality of properties and services to tenants. But letting agents are not generally able to provide sophisticated property asset management solutions.

However, in all other respects the buildings are the same as those that managing agents across the country already manage for private leasehold owners and freeholders - in excess of 2.5 million units.

Modern blocks require sophisticated management solutions. They are filled with plant and machinery that requires adequate maintenance and long term capital expenditure and sustainability strategies. The compliance and health and safety regimes are the same. They need fire strategies, parking strategies, they require cleaning, decorating and landscaping and importantly they need customer services and response lines – just like long leasehold units.

Client landlords will demand long term strategies and modelling based on accurate budgeting and pre agreed returns. This is where understanding cost controls and budgetary management becomes essential. It is where asset register, cyclical plans and energy efficiencies need to be understood from the outset. It is where early attention to detail will reward investors. No one has more experience in this area than managing agents who have been working with developers on large new build urban blocks for many years.

There is a further opportunity also. Managing agents are well placed to provide additional services and time poor young professionals will be looking for hotel style services such as furniture packs, cleaning, laundry and concierge. Management of rental blocks is not constrained by leasehold legislation and will allow for considerable innovation and imaginative costs control, cross subsidy and leverage of purchasing power.

There is one group already gearing up to provide the solution and they have a good deal of experience. Registered Social Landlords have had a few years of taking on developer built apartment blocks and have learnt fast. They understand that cost control is imperative and quality is rising. They have learnt from the private sector.  They are far from perfect, but do not underestimate their resolve. One has recently purchased a large managing agent. The risk is obvious.

Managing agents have had a long and difficult journey in the last ten years but lessons have been learnt and new and innovative ways of delivering safety, security and quiet enjoyment to their customers are now becoming the norm. Private rental of the scale that build-to-rent proposes must be regarded as a significant opportunity for property managers. It is for the industry to sell its unique skills to this new investment class and the clock is ticking.