Property owners in Dubai are ditching service charges... and citing COVID-19 as the reason for delay. But it's causing issues for property management companies, and it's reaching a crisis point. Image Credit: Gulf News Archive

Dubai: Many property owners in Dubai are skipping payments of service charges, using the cover of COVID-19 as an excuse. Payment collections since February have dropped by even 70-75 per cent of what they should be, industry sources say.

If the situation is allowed to continue, it will see owner associations and their management companies with fewer funds for the upkeep of the buildings.

Sources say most of the defaults now are happening because homeowners are using the “cover” provided by Dubai’s recent waiver of fines for non-payment or delays in paying off service charges.

“But the Real Estate Regulatory Authority had clearly said the waiver only extends to 2019 fines,” said the head of an owners association. “So, far, there has been no extension of this to service charges due for this year.”

As the payment backlog piles up, owner association management companies are sending out distress signals. These businesses are overly dependent on these collections for their day-to-day services in the upkeep of the properties.

“There are many homeowners taking advantage of the pandemic by giving excuses of non-payment - even if they have not faced a blow to their business or salary cuts in their jobs,” said Saeed Al Fahim, CEO of Stratum, one of the biggest names in the local facilities management business.

“There has been tremendous increase in outstanding service charges across all communities in Dubai. The reality is each community suffers when service charges are not paid timely.

“Sadly, these homeowners don’t realise this and the entire burden comes on us - as OA managers - to pay the service providers and keep the community functioning.”

This arrangement won’t make for a sustainable business.

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RERA needs to step in and resolve the non-payment issue, says Saeed Al Fahim of Stratum. Image Credit: Gulf News Archive

Waiver of fines

It was in April that RERA made its announcement about exemptions for all fines related to service charges in 2019. At the time, the government entity also said it was working to bring down services charges for this year after consultations with all stakeholders, including owner associations and the property management companies acting on their behalf.

“RERA directs [OA] management companies to review all expenses to cut down service charges,” a statement at the time said.

This was in response to the crisis faced by individuals on the professional front after the outbreak of COVID-19, which led to organisations initiating job and salary cuts.

The 2020 owner association budgets are still awaiting approval – “RERA has made an exception to submit provisional approvals until June and property owners can expect to get a final word on this soon,” said Sameer Lakhani, Managing Director at Global Capital Partners.

“RERA has told all OA management companies to try to lower the 2020 budgets, which would, in turn, lower service charges as well.

“It’s definitely a plus for homeowners - but this has adversely affected property management firms. Homeowners have started asking for a discount on service charges and not paying until the discount is given.

“Which is not possible, as the amount approved by RERA has to be paid.”

The 2020 owners association budgets will be approved shortly. Service charges could drop for the first time in five years and more. Image Credit: Gulf News Archive

Calling RERA

Once the 2020 OA budget approvals are done with, RERA would address the thorny issue of non-payments this year. OA management companies need RERA approval to issue notices and follow up legally against errant homeowners refusing to pay up.

Sources in the FM industry confirm that the next six months will prove extremely tricky on the operational side. Clients, both in the residential and commercial space, will insist on FM companies dropping their rates… or cancelling the contract and going to another one for even lower charges.

And everyone will keep pointing to COVID-19 as the reason for the current distress… and difficulty in non-payment.

“Notices will be issued immediately once RERA gives us a green signal,” said Al Fahim. “All guidelines with regards to number of notices any one homeowner can receive, the penalties for non-compliance, payment timelines etc. will be laid down by RERA and which will be followed by OA management companies.”

A grace period?

OA management company sources have mixed views on whether homeowners should be given longer extensions to pay up.

“We are trying to make it as easy as possible for the homeowners to make payments, just so that the we have some collection going for the community,” said Al Fahim. “However, this totally depends on the period of the service charges not being paid.

“For example, in case there are owners who have not paid since 2 or 3 or more quarters, we give them a relaxation by splitting up the amount in 2-3 payments. But we will ensure the first payment is taken at the earliest.”

There are others in the industry who insist that extended grace periods will only place their businesses at great risk. They say their cashflow generated in recent weeks were not enough to cover the basic costs, and the mid-sized ones are now dipping into the fast depleting reserves to sustain a bare minimum level of operations.

“How can any OA management company survive if collections are down to 30-35 per cent of what they should be?,” said one industry source. “This will affect the buildings and the communities if this persists… and the property market.