Dubai skyline
Homeowner management companies will have to issue bank guarantees linked to service charge budgets for the buildings they are handling. Image Credit: Gulf News Archive

Dubai: Property management companies acting on behalf of homeowners associations in Dubai may need to put up bank guarantees for each project they are handling. This could be equal to 20 per cent of the annual service charge budget for that building.

Essentially, what the bank guarantee hopes to achieve is be like the escrow account developers have to maintain on all offplan projects. A guarantee put up by the OA management companies would act as a safety net in protecting the interests of property owners in that building/community.

Dubai’s real estate rules always had a provision for such a guarantee, but it could soon be activated in full, according to market sources.

It was last year that Dubai updated its JOP (Jointly Owned Property) Law that set out clear guidelines for developers, homeowners and property management companies acting on their behalf. The Law built in ample protection for property owners in taking decisions on the upkeep of their buildings, and, just as important, who should do it for them. Developers had to ensure that they allowed homeowner associations to be set up once the project is complete – only then will completion certificates be issued by the regulator.

“Requiring bank guarantees from OA management companies could be seen as an extension of the JOP Law,” said a lawyer specialising in real estate. “But putting up these bank guarantees will be an additional cost burden on property management companies.”

According to the head of one of the biggest property services companies in Dubai, the requirement for a bank guarantee is “just a matter of time”.

“To fine OA managers for any future violations, those monies need to be available to be drawn down,” he added. “This is what the bank guarantee would serve.”

Stiff costs

Sources in the property management space agree that the guarantee represents an additional burden on them. Even setting aside 10 per cent of the annual service charge budget would be tough under the current market circumstances, they say.

“Because whether it’s 10- or 20 per cent, it ends up as funds that cannot be utilised on property upkeep and paying facilities companies,” said an OA management company. “Already, from the funds collected from each owner, 10-15 per cent gets set aside into the “sinking funds”.

“If the bank guarantee is implemented, that’s another 10-20 per cent on top of that, and would leave limited funds for upkeep.”

Will charges flare up?

Industry sources worry that some of the costs associated with putting up bank guarantees will need to be passed on – whether to facilities management companies or the property owners.

But in the current climate, raising service charges or associated costs will be a tough sell. Dubai’s real estate authorities have been calling for an across-the-board reduction in service charges for 2020 and beyond.

Not passing on the higher cost of operations would be detrimental for property management firms, sources add.

“If bank guarantees are enforced at this stage, there will be further attrition on the part of OA companies,” said a top official at one firm. “More jobs will be lost… and more will go out of business. “Yes, the asset needs to be protected, and so do homeowners and tenants. But the OA companies need some relief too.”