Increasing service charges against the backdrop of declining property values and reducing rental income remains a major irritant for Dubai homeowners. These charges have increased between 10-25 per cent in the last four years – a time when property values declined by around 20-30 percent – and making buying and living in freehold homes more expensive.
Those who purchased homes for investment purpose have witnessed their return on investment declining every year, making such purchase less attractive and in some cases uneconomic – a trend that is dangerous for the emirate’s real estate sector. If this trend continues for long, investors might shift their investment into other asset classes, and that might severely affect the future sale of properties.
Valid under certain conditions
Yes, service charges do go up as the cost of maintaining older properties go up with time. And yet, they have been an issue of concern for buyers since the beginning of the freehold property boom when developers took advantage of the lack of a regulatory framework.
While most developers kept the service charges at moderate levels, some used to bill home owners as high as Dh25 to Dh30 per square feet (psf) at the beginning of the freehold boom in 2005-07.
For an apartment of 1,000 square feet, the service charge bill would be up to Dh30,000, at the rate of Dh30 psf in those days. Clearly, the intention of these developers was to make more from homeowners. Keep in mind that an investor has to calculate this cost in addition to the equated monthly instalment (EMI) on the mortgage.
Debilitating income gains
For a 1,000 square feet apartment, the investor will be lucky to get annual rental income of Dh70,000. If he has to deduct Dh30,000 as service charge, he is left with only Dh40,000 per annum, or Dh3,333 per month, well below his monthly EMI. In this scenario, he will continue to pay from his pocket for the duration of the mortgage period.
However, Dubai’s real estate market shifted from an unregulated environment to a well-regulated one, especially after the enactment of the freehold property law in 2006 and the establishment of the Real Estate Regulatory Authority (RERA).
RERA has been adding new regulations to reshape Dubai’s property sector and bring it on par with the developed markets. A few years ago, RERA introduced the Owners’ Association and gave it a legal status for the management of the property. It also launched ‘Service Charge Index’ - to create the benchmark service charge rate for each type of property, be it an apartment, villa, townhouse or a penthouse – for Owners’ Associations and homeowners and other stakeholders.
The problem, it seems, has not subsided due to certain grey areas. The Service Charge Index offers a benchmark reference rate for service charges. However, Dubai Land Department and its regulatory arm RERA have not yet enforced the benchmark as a legally binding rate for all parties.
It is still used as a point of reference for bargaining on the rate. That’s why not very many people are taking the Service Charge Index as a thumb rule.
Going forward, service charges should not be seen as a money-making business. The grey areas need to be sorted out. There should be more clarity on what the homeowners paying for. Owners’ Associations should offer clarity on the expenses, budgetary allocations and how the service charges are being spent – to be more transparent.
Regulatory oversight could be strengthened, if need be.
- Rizwan Sajan is Chairman of Danube Group and a property investor.