With the guidelines accompanying Dubai's Jointly Owned Property Law released, all eyes are on developers. The onus is on them to form interim home owner associations (OAs) and register units with the Land Department. Property owners, meanwhile, are biding their time to see whether the transition in power translates into reduced service fees and improved building maintenance.
Caught somewhere in between are the facilities management (FM) firms, which form an integral part of the strata arrangement. They have much at stake as they try to find a place for themselves in the new scheme of things.
For starters, FM firms have realised that as per the guidelines released by the Land Department, any service contractor entering into a supply agreement with an OA may not sub-contract any part of the services to third parties. "It is the management and co-ordination of services that relieves clients from the mundane headaches of ensuring their facilities are properly maintained. Remove the management or co-ordination from the equation and you're left with 10 to 15 contractors all working independently and most certainly chaotically. So we don't understand how this new regulation is going to assist clients to enhance the equity of their properties," commented one FM industry professional, who wished to remain anonymous.
FM companies perform services such as cleaning, pest control, security, landscaping and so on, either in-house or sub-contracted to specialised service providers. The OAs will pay a mark-up or management fee to FM firms to take liability, payment guarantee and ensure the sub-contractors are co-ordinated and perform in line with expectations.
Bulk buying
There is apprehension in the market that without any regulatory checks in place, the clause relating to sub-contracts could result in independent service providers unanimously increasing their prices, eliminating any possibility of savings. This restriction could also have an impact on the ability of FM companies to pass savings on to owners, when they are limited in bulk purchasing services from third party sub-contractors.
"It is possible that pricing becomes less flexible but, furthermore, this may drive the premium up for FM firms that can deliver," says Saud Masud, head of research and senior analyst, real estate, Middle East and North Africa, UBS.
However, there are some who argue that such instances may be more of an exception than the rule.
"It is hard to argue that there are no bulk-buy savings, but in many cases, I think the mark-ups will exceed those savings. There may be exceptions, but overall, I think there will be savings." says Gary Bugden, executive chairman of PRDNationwide Property Services.
One particular fallout of the curbs on specialist FM companies is that OAs are likely to lose out on their buying power. It will also result in compromises being made in a range of areas. "The OAs will be forced to manage a number of maintenance companies without the expertise to do so. This could potentially impact the long-term asset value, increase the risk to the OA individually for the loss in value, health and safety risks and operating reliability of plant and equipment which, in commercial contracts, are items contractually passed on to an FM company," warns Ian Kennedy, senior facilities manager, Brookfield Multiplex Services.
The restriction on outsourcing and, in turn, management fees are also expected to erode FM firms' profit margins. "How are we to make money without a mark-up on managing sub-contractors? Everything is an open book today! The general management fees are just enough to cover corporate overheads. Margins have shrunk, [and now] with the new law, they will soon evaporate," the anonymous source adds.
"The smarter FM companies may diversify in terms of hard and soft services. We may even see smaller service providers being bought, or sister concerns merged. However, until we see the enforcement of such action, we don't think companies will jump to conclusions and go into an M&A spree."
Business-savvy FM firms would nevertheless alter their working model to cope with the changed market conditions. While most are likely to stick to their core competencies, there are others which could diversify into the field of strata management or source existing third party services to add to their competencies.
"If an FM company diversifies it will need to engage strata management professionals, because the FM skill sets do not fit well with the administrative nature of strata management. The reverse also applies. A conventional strata management company, traditionally focused on administration, will need to acquire FM management expertise if it is to succeed in Dubai," says Bugden. In the case of FM firms looking to diversify into strata management, there are fears of a conflict of interest.
"One difficulty that FM companies may face is that the permissible activities under an association manager's licence may be limited to only undertaking the function of the association manager and preclude other activities such as providing FM services," explains Stephen Kelly, legal director, real estate, at commercial law firm Clyde & Co.
"In addition, the code of conduct by which the managers are bound states that an association manager must not do anything that would have the effect of placing their interests in conflict with the OA's interests. The association manager must also disclose all relationships to the OA regarding any actual, potential or perceived conflict of interest between the association manager and any supplier of goods or services to the OA," says Kelly.
In-house providers
The demand for FM practitioners had soared during the construction boom and some cash-strapped developers had then eyed it as a revenue-generating source. After the downturn, while losses on the construction side have mounted the strata guidelines bring new challenges for developers with in-house FM departments as they are left to grapple with shrinking margins.
"I believe in-house FM teams will remain involved as long as these plans remain under developer ownership. Once the plan is registered, these internal FM teams will, I assume, decide whether they will enter this market as a service provider or remain as the in-house provider only," says Kennedy.
FM firms were able to leverage their association with developers to gain visibility in the industry. "Now, perhaps, the visibility would be narrowed," adds Masud.
In an evolving scenario, it is likely that most developers will either reprice tenders or withdraw from FM and instead focus on their core offering — property development.
A source quoted earlier says, "Most FM firms within developers sprung up assuming it was easy or clients would accept what they were offered. However, we're sure by now they've realised this wasn't the case. There is no doubt that they will have to adapt prices to qualify for tenders."
Specialised entities
"A single FM company, when possible, is best for most buildings. Specialised companies are needed, especially after the new strata law is fully in place to support the FM companies and the home owners' associations (OAs). Finding well-rounded strata managers will be a challenge for OAs. Dubai, like other major cities in the world, has a diverse range of buildings."
Douglas Ralph, managing director, Snag & Inspect