In Dubai, home owners associations (HOAs) have both been increasing the power they exert on the value of ready properties (by virtue of the upkeep that they provide to the community) as well as exert their influence by going after owners not paying dues. (With courts now allowing them to auction off properties of non-paying property owners).
This has meant the services that HOAs provide directly impacts the value of the asset and is therefore a significant criteria in the decision-making of potential buyers of ready units. The same should be applicable for offplan units as well, as service fees can often be inferred by the amenities the developer is providing.
Line items in the budgets approved by RERA gives the potential buyer an insight into where the proceeds of the fees are going. The reserve fund allocations will give an insight into the capital expenditures, whereas running expenses reveal what is being done for the quality of the upkeep.
Buy the bargain mindset
In the midmarket, the variability of the service fees is significant and the knee-jerk reaction has been to acquire the property with the lowest charges. Even though studies have shown there is an actual positive correlation between the rate of change in service charges and the price appreciation of the underlying asset.
Surprisingly, the correlation increases when we talk about luxury properties, although the boom in their prices over the past two years has skewed the results. In an era of scrutinizing cash flows, it is imperative to look at the reputation of the OA provider (perhaps even more so than that of the developer) and the level of services in exchange for the fees levied.
It is inevitable that in the next few years many of these OA providers will go public. (The same can be said for the HOAs themselves as is already transpiring in America).
This will further increase transparency as investors and homeowners get further insights into the profitability of the OAs as well as their ability to manage ‘float’. RERA already provides for a transparent access to the budgets set every year for each building and community.
Hitherto, the outlay for service fees has always been something considered as a liability and a variable that should be minimized, especially in the mid-income space. But this mindset is already starting to change with a more activist approach being demanded by individual unit owners in their quest to preserve and enhance the value of the asset.
This, by definition, implies that the variability in the pricing of the units in the secondary markets is a function of the quality of the upkeep of the building and/or community. And gimmicks that the developer offers (such as ‘guaranteed RoI’) often get eroded based on the degree of services the HOA provides.
Weight of service charge costs
Curiously, the issue boils down into a tradeoff between cash flow (that has to be paid now) against capital gains that will accrue at some point in the future. In the freehold space, we are already seeing this being more of a factor in determining the value of capital gains (by as much as 35 per cent) that is accrued to the investor/end user.
It is in this context that proper HOA management cannot be emphasized enough, and the standard mindset of minimizing outlays is simply setting the stage for medium- and long-term disappointment. That does not imply that such outlays need not be scrutinized; in point of fact the opposite is true, especially as newer offplan launches simply ignore the inevitable service fee charges that will be levied. (At higher than current averages, which are already running at up to Dh2,500 per month and more in certain mid-income communities).
First-time as well as existing buyers will be well served by asking pertinent questions on service charges as a way of determining the path cycle of capital gains and/or losses. And the upkeep of the asset they are purchasing.
The ecosystem as a whole will benefit with more research being focused on this critical variable of decision-making, especially as owners scramble to contain costs in a high interest rate environment.
The key variable, as has always been the case with the service industry, is the quality of management provided, and asking the right questions will go a long way in determining that.