As Dubai's jointly owned properties move towards owner management of common areas in accordance with the Jointly Owned Property (JOP) Laws, most of the attention so far has focused on unit owners, investors and the formation of owners associations (OAs).
On the other hand, the implementation of the strata law — as it's known elsewhere in the world — means that developers will soon surrender control of their buildings, and effectively their brands, to a body that they will soon have limited influence over.
In the context of various disputes in Dubai over inflated service fees, few might have sympathy with the developers. Indeed, as Saadallah Al Abed, senior consultant, research and advisory, Colliers International, puts it, "The strata law aims to stop the practice of profiteering off the service charge rather than the transfer of the management of the building/community to a different facility management company."
However, it could be argued that a developer or brand owner's reputation could be at stake in the event of a poorly maintained property.
Kent O'Brien, CEO and managing director, Strata Global, says once a developer hands over the management of the common areas to an OA, the ball's in the owners' court. "There is no requirement or obligation on the part of the owners as it relates to maintaining the developers' brand, except perhaps under Article 26 of the Directions for General Regulation released recently that gives Rera (the Real Estate and Regulatory Agency) the power to take action if the owners association has failed to maintain the common areas. This is a major issue for branded residences in the new wave of resorts in Dubai and the only mechanism available is to include a clear definition of required standards and levels of maintenance (for example, as a five-star resort or hotel) in the Jointly Owned Property declaration."
Effective ownership
Many strata management firms agree that developers and operators of branded residences (often hotel apartments) stand to lose the most.
Yet Al Abed says, "Branded hotel residences will always be operated and maintained by the hotel management company and it is highly unlikely that the law will have adverse effects on the brand of the developer."
However, Andrew Charlesworth, head of capital markets, Jones Lang LaSalle Mena, believes this is largely dependent on the management skills of an OA and its strata manager. "Much will depend on the effectiveness of the new strata laws in terms of making sure strata owners fulfil their obligations.
"In general globally, strata owned buildings do tend to be harder to maintain in terms of condition and presentation due to the need to have so many owners aligned on factors such as service charge payments, sinking funds and budgets."
Branded residences
Although he understands a branded operator's concerns, O'Brien cannot fathom why a developer would resist the handover to an OA. "I do not see why any developer wants to impose its long-term vision on others. However, if the developer still has an interest in the property — for example, a hotel component — it needs to safeguard the standards of maintenance and the management plan implemented by the board. If the OA ignores the declaration requirement as it relates to standards, we could then see owners — including the developer, which may be an owner in its own right — lodging complaints with Rera and an administrator being appointed or a fine imposed as detailed in Article 26. This could lead to a period of disputation between owners, especially if someone has to adjudicate on what is five-star standard or not. The definition and description of standards needs to be well thought out."
In accordance with the strata directions, O'Brien says OAs could potentially move to even disbanding a branded residence. "If the OA as a group — and not as a small fraction within the group of owners — decides things have changed since the property was developed and sold to them with the promise of a branded residence, then there is nothing stopping the OA implementing another option without the brand."
O'Brien says, however, that although such a move might lower service charges, it could also reduce the value of individual properties and the overall community.
"It is most unusual in other co-ownership jurisdictions for developments of this nature to be restricted in the way proposed in Dubai," he adds.
"The ability for the developer to arrange long-term management agreements — especially if disclosed at the time of purchase — should be reassessed in as much as we may see branded operators walking away from these developments."
If the process is transparent and upfront, he says all parties should be satisfied. "However, a termination clause should be available based on established KPIs (key performance indicators). If not, we could see long-term deterioration of standards as the operator keeps cutting services and manpower to secure better margins." The more alarming issue for developers, he adds, are the consumer protection provisions "which are perhaps the most consumer-oriented I have seen anywhere. In addition, the disclosure that will be required — in particular, developers must warrant the accuracy of their information, which will cause developers to rethink their approach to marketing.
"I feel the [strata law] directions, as they relate to disclosure, will close down many of the current operators in as much as only good developers which have been in the business for some time and are not too concerned with disclosure will survive."
Developers refocus
With the implementation of strata, developers are likely to abandon their facilities management (FM) arms.
Charlesworth believes developers should focus on their core function. "FM is a specialist business and is often better and more efficiently performed by firms with dedicated expertise. Margins in facilities management tend to be low and it is a labour intensive business, so unless developers have substantial portfolios that can benefit from economies of scale then in many cases it is better they outsource this activity."
Moreover, he says there may be some positives in developers returning to their core function.
"In global terms, developers are often better off focusing on their core competencies of developing, investing and holding assets and not try to spread themselves too thinly by, for example, also trying to bring in non-core service orientated activities."
Investor confidence
"The law aims at improving investors' confidence through higher levels of transparency and aligning the market with international standards."
Saadallah Al Abed, senior consultant, research and advisory, Colliers International
"Good legislation that addresses the needs of all parties is always going to be welcomed by the investment community. It will bring clarity and transparency which is important. A good start may be to study what works well or not in other markets and use those experiences as a starting point for similar laws in this region."
Andrew Charlesworth, head of capital markets, Jones Lang LaSalle Mena
