Strata management profitability is falling and a sudden removal of insurance commissions could pose an “existential threat” and lead to worse outcomes for property owners, an industry CEO says.

The NSW government is considering banning strata management commissions after last year asking Fair Trading to consult on the issue. Legislation has already taken effect to improve transparency of fees and commissions paid to managers, brokers and other service providers.

PICA Group CEO Bobby Lehane says there is a lack of awareness about profitability decline in strata management as revenues stagnate while costs and building and regulatory complexities increase.

“The government is trying to address consumer concerns, which I understand, but if addressing those causes a broader sector failure, then that’s a much worse outcome for the consumer,” he told insuranceNEWS.com.au.

PICA says it is the nation’s largest strata management company, with about 11,000 strata schemes and 190,000 lots, ranging from townhouse complexes to a 2000-unit development.

Mr Lehane says owners are highly price-sensitive on strata management fees, reducing the ability to increase fees if commissions are removed, while the sector is at the end of the insurance chain and there may not be an equal offset.

“The glue that holds it together is commission, so just removing the last part probably doesn’t make a huge amount of sense,” he said.

PICA recently engaged an independent company to survey strata owners across NSW, Victoria and Queensland, and received more than 400 responses.

In NSW, 71% of people did not want the strata management fee affected, while 29% favoured removing commissions and increasing fees. About 34% supported maintaining current commissions that help offset strata management fees, and 38% preferred a fixed insurance fee paid by the insurer.

Mr Lehane says PICA has suggested a mechanism to NSW Fair Trading in which commissions would be replaced by fees “paid by the insurers that are predictable, that are disclosed and that compensate strata managers for the significant work that they do in the insurance space”.  

It proposes the insurance chain to brokers would continue as is; the strata manager would charge the broker a fee they can recover for work on insurance; and per-lot fees would vary depending on the size of the scheme, reducing for larger schemes, with future years capped at CPI. An alternative would be available where owners do not want this arrangement.

Mr Lehane says unless the income paid by the insurance industry to strata managers for their role distributing insurance continues, the sector risks a decline like that of the aged care industry.

“The aged care sector saw sustained profitability decline, which led to an exodus of skilled professionals and investors. This resulted in deteriorating services to clients and eventual government intervention. The strata management sector has endured a sustained period of declining profitability and viability, so any significant changes to remuneration from insurance at this time represent an existential threat.”

Mr Lehane says PICA has less than a 15% share of the highly fragmented strata management market.