To be sure, any discussion relating to smart home technology inevitably encroaches on the issue of home owners associations and by extension that of facilities management. There has been substantial commentary on the hyper-competitive nature of this industry, and how this has led to poor management services being offered.
This ultimately boomerangs into poor upkeep of the asset and therefore lower re sale values. Unsurprisingly, this has already started becoming visible in the data; investors who have overlooked this critical aspect in the first boom-bust cycle of Dubai’s freehold have started to pay the price in terms of their resale values.
Herein lies a clarion call: much like the real estate industry in the rest of the world, investors and end users in Dubai will have to make investment decisions based on the pro-activeness of the “association board” if they are to enjoy above market returns over time.
It is not at all surprising that in the one-way markets that Dubai experienced in the first cycle of 2002-08, as well as the subsequent decline in asset values, the role of facilities management and that of home owners associations was systemically ignored. Evidence suggests that in the evolution of most real estate markets, this was the typical experience.
In point of fact, the role of home owners associations (historically considered to be a “premium service”) was relegated to the backwaters of decision making. And thus was always outsourced using the extended enterprise model. The output, typically, was a degradation of the asset.
The poor upkeep of the building led to lower resale values, and over time (measured over a decade and above), the predominant distinguishing factor between upper and lower quartile resale values was not views or locations, but rather the role of owners associations. In an article for “Harvard Business Review”, the authors concluded that 63 per cent of the price differential could be accounted for by the level of budgets and the role of the Board over a 15-year time frame.
In Dubai, the role of the home owners association has been a recent development. Already, however, what has been witnessed is a clear distinction in prices. Even in upscale areas like Dubai Marina, there have been instances (more so towards the southern part of the area), where the differential between the upper quartile and lower quartile prices have been an astonishing Dh300 per square foot.
While this looks surprising, anecdotal evidence abounds where tenants and investors have been complaining about the upkeep of certain assets as developers have cut corners, that have only shown up visibly over a passage of time. Across Dubai, the min-max levels are actually increasing, suggesting greater degrees of variable quality in post handover building management.
What investors and end users need to keep in mind is that a proactive home owners association is part of capital expenditure. It adds value to the asset only over the longer term. In Dubai’s market, where the bulk of the investors historically have been based abroad, the emphasis thus far has been to keep costs low, thereby maximising yield.
This has come at the cost of the upkeep of the asset. What we have seen in our experience (this stands the evidence of time internationally as well) is that “high yielding” buildings subsequently trade at discounts to the market. Moreover, in times where the market is focused on quality more than price (the current environment of Dubai), even the yields start to fall, as tenants have better options to choose from.
This implies that there is no free lunch available to the long term investor.
It is up to the investor and the end-user to exert pressure on to their building managers if they are to preserve the value of their asset. Happily, we are starting to seeing this factor enforcing itself more and more in the local real estate market.
For overseas investors, as well as domestic residents, the role of technology in the upkeep of assets is moving to the forefront of decision making. This will force developers to engage with their stakeholders and instill a culture of a proactive home owners associations, one where longer term thinking prevails.
This is a slow moving trend in the industry; what is obvious is that this trend is finally underway.
The writer is Manager at Unitas Tech.
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