There are multiple instances where lower service charges have gotten in the way of maintaining the asset quality. Investors learn about it the hard way. Image Credit: Shutterstock

Over the past 20 years, there have been three prevailing trends in the housing markets.

• A greater demand for gated communities, with a 10-fold increase in American households living in such communities, with similar trends in the UAE.

• Newer builds typically sell for more than older units, despite being on aggregate having a lower square footage.

• There seems to be a direct correlation over time with community maintenance charges and prices of housing units. Even though at the time of purchase, the initial correlation seems to be the reverse (higher common area charges lead to lower preponderance of purchases).

What are investors to make of this? The demand for gated communities encompass three major variables: prestige communities such as Emirates Hills, Dubai Hills, Jumeirah Golf Estates; lifestyle communities which emphasize recreational and leisure facilities with a focus on shared services and include areas such as Nshama, Damac Lagoons; and, finally, security zones that reflect demand due to the increased measures of security they provide. (The latter is a phenomena that does not include UAE, but extends to markets like Egypt, the US, etc.)

There is clear evidence that gated communities have outperformed, but this has been partly explained by the move towards luxury purchases. This ignores the latency of demand for areas that in the mid-income space that have always been constant, yet have not captured the zeitgeist or the headlines, despite data that suggests that there have been cycles (especially during inflationary times) where these communities generate a greater total return.

There has been equal - and contrary - evidence where increased homogeneity of units within the communities leads to price resistance as these communities age. But that overlaps into areas of increased common and unit specific charges. This generates demand for newer gated communities and/or for refurbishment, either of which requires increased capital outlays.

Developers respond to this by optimizing newer land parcel areas leading to unit area reduction. In Dubai, the median differential reduction in size has been between 8-13 per cent over the past 15 years, mirroring trends seen internationally.

Seek out ‘better managed’ buildings

Finally, as common area charges come under increasing focus, we have areas and buildings with lower service charges that over time deteriorate. Yet, in the short-term see higher demand as investors buy into the illusion of getting higher yields, only to pay for it later as the asset deteriorates.

In Dubai, there is tangible evidence of this where areas like the Greens and the Views with relatively higher charges have had a positive correlation in price because the quality of the asset have been preserved, when compared to other buildings in JVC, International City, Furjan, JLT, where assets have aged because of underfunded budgets. Service charges are a factor in decision-making for investors, but given the gap that exists in pricing between offplan and ready, the temptation to move towards buildings that have lower charges must be resisted. (This is analogous to capital market investors that must ignore the temptation of over leveraged balance-sheets).

Hands on OAs

Instead, as we are starting to see from the data flows, communities like JLT, Marina, Greens, Business Bay and Springs where there is considerable discrepancy between newer and older builds, there should be a process of investing in JOPD where there are activist boards that are looking for the preservation of the underlying asset.

Investing in older builds that have higher square footage requires investment in maintaining that asset, such that there is value creation. OA Boards become the equivalent of management of companies. And for well-managed boards, time is on the side of investors.

End-users as well as investors would be well advised to capitalize on the current market dislocation to capitalize on this opportunity, rather than jumping on the bandwagon of offplan sales. As the late Jimmy Goldsmith was fond of saying ‘If you see a bandwagon, its already too late’.