Dubai: Some local developers, it seems, are just not getting it. One developer in Jumeirah Lakes Towers unilaterally went ahead and jacked up service charges for this year by a substantial Dh6 a square foot to Dh18.
The owners in the high-rise learned about this when they received an e-mail from the developer late last month.
All of this was done without following due process as indicated in the Strata Law, by which tenants — or their representatives through an owners association — are involved in the decision-making and the service charges are set after an extended — and transparent — auditing of the property and its needs.
The developer's move goes against the prevailing regulations of the Strata Law which, having come into effect, effectively give the owners associations the right to set service charges.
All that the cryptic e-mail issued by the developer to the tenants states is the decision to raise service charges and that all dues should be cleared before the end of the month. Moreover, the developer adds that the service charge hike has been "approved by Rera [Real Estate Regulatory Agency]."
Tenants in the high-rise are not taking any of this quietly. "How can the developer say that this has Rera's approval when no homeowners association has been set up for the building?" said Elizabeth George, an owner. "How did they even come up with the Dh18 a square foot number when none us is even aware of an audit having been done?
"And who gave them the right to set the service charges when the Strata Law clearly requires owners associations to be the responsible entity to do it?"
Isolated instance
Clearly, this particular developer is not in sync with the rules of the land. Unless the developer backs off, the tenants at the high-rise are in for a summer of attrition. This particular drama may well be an isolated instance of a developer trying to get its way as was the case in the years leading up to the full passage of the Strata Law. But what it clearly indicates is that not all of the developers are reading from the same book. And where such aberrations occur, the authorities need to step in and play the enforcer.
Dubai — and for that matter Abu Dhabi — will see a steady stream of completed properties hitting the marketplace in the coming months (even though it will not be in the high numbers that would have worsened the over-supply situation). What property owners — and the prospective ones — will require is some clarity on their rights vis-à-vis the Strata Law and in setting service charges.
For many prospective buyers — and there are still a few out there — the perception that service charges are way too high is one of the key factors holding them from committing to an investment. They do not want to be caught in a situation where they place their properties in the rental market and the proceeds are barely above the annual service charge payments.
"In most cases, tenants do not pay the service fees, landlords pay," said Tom Bunker, investment sales consultant at Better Homes. "However, in some cases, landlords add the service fees to the rent amount and where this results in a very high rent, then yes, tenants will be hard to find.
"Where service fees create a problem is in sales: buyers initially ask for the price of the unit and then in the same breath, what the service fees are. In most cases, buyers today are looking to rent the unit out and need to know what their expected net yield will be. Where the service fees are high, this will not bode well for the sale of the property."
The high fees regime was supposed to change with owners associations taking on control of their properties. So far, it has not panned out that way.
"The registration procedures and legal framework are very complicated and it will be some time before these associations are running fully," said Adrian Camps of Fine And Country, a real estate agency. "But I would be very surprised if there were not substantial savings to be made once all the maintenance and service contracts are put out to tender."
At many of the properties where owners associations have assumed control, auditing is going on in terms of the funds required to provide optimum maintenance. But homeowners are realising it is not a simple arithmetic of arriving at a figure that is lower than what the developers — and their facilities management companies — were setting. In the recent past, utility charges have gone up by more than 30 per cent; other costs that have a bearing on service charges are also rising.
Reputation
The age of the property is one such factor that would have a telling say in setting the charges. At one high-rise in Dubai, the owners association actually raised the service charge by Dh1 a square foot to Dh11. "The building is now four years old and the audit found the earlier service charge would not be able to cover its upkeep," said an owner.
With the first wave of completed buildings in Dubai's freehold clusters approaching the five-year mark, this could be a sentiment that will repeat itself.
"There is certainly something to be said about the age and quality of build of the buildings also the quality of the equipment [elevators and chillers] that have been installed," said Bunker. "For those towers with lesser quality standards, there is no doubt service fees will increase.
"However, there are numerous towers in Dubai properly built and managed and at these, service fees should remain more or less unaffected."
But industry sources still believe Dubai real estate's reputation of having a high service fee regime will change. "Service charges vary as per the type, design, area, build quality, etc.," said Dilip Khatwani, head of Reliance Facilities Management. "But it should not vary dramatically in the same type of a building. If it has, there must be improper calculation of the service charge.
"So far, there was no standard defined in calculating it which led to such large variations. Now, service charges will be calculated properly as Rera has defined the right process."
It may then not be a stretch to imagine this would have a say in any future recovery for the local property market, one reason why unilateral moves by developers to retain their powers on framing service charges would have extreme consequences.
Let the owners — and their associations — decide what's good for themselves.
