Dubai: The absence of sinking funds and exorbitant maintenance charges throughout Dubai could leave existing investors out of pocket and new ones thinking twice before buying.
"Service charges have got to come down a bit more, the service fee levels are putting pressure on prices. The problem is that the returns at the current service charges don't justify the investment," said Gary Bugden, executive chairman, PRDnationwide.
Developers, he said, also need to look seriously at how they are designing future projects as water features are too expensive to maintain. "The reality is that infrastructure in Dubai is very expensive to maintain."
Developers up to now stayed in control of the project so owners were at their mercy calculating what is needed for maintenance. In most instances developers had no idea how much service fees were upon sale, never mind the sinking fund.
Mazen Falhout, general manager, MAGme Property Solutions, believes that property buyers should have been more particular about add-on costs but were too busy speculating rather than factoring in the hidden capital investment needed over the years.
"Prior to June 2008, investors did not care too much about service charges or operational costs, many were only speculating on the rising price. Now that the party is over, owners have to be responsible for their investments," he said.
Consequently, he said, some owners were jeopardising returns on investments by not adequately accounting for depreciation on mechanical, electrical and plumbing equipment.
A chilling unit, for example, in an average tower has a life span of about 10 years and replacing it could cost as much as Dh2 million to Dh3 million.
"If there is no ‘sinking' fund, owners have to foot the entire bill at that point of time which could be substantial. Many owners are now faced with fees that they cannot simply pass on to tenants if they want to remain competitive in the market," Falhout warned.
The sinking fund, which requires a fee to be paid by all unit owners based on estimated wear and tear, is now an obligatory feature to be disclosed by developers and home owners via their associations can take control. But it could come too late for some, as rents took a 40 per cent dip over the last year.
Bugden though said there is still time as the sinking fund is created over 10 and up to 20 years. "Owners may be a couple of years behind and the fund may be more heavily used here as some things wear out quicker than elsewhere but there is no excuse not to start."