In Dubai, service charges on property have remained mostly stable across the board, whether for individual buildings or communities. Property owners hope status quo will prevail this year too. But there will be other changes. Image Credit: Shutterstock

Dubai: Property owners in Dubai are unlikely to see sharp rises on their 2023 service charge payments as Dubai Land Department and the various owners association (OA) management companies work on the numbers. If at all there are any increases, those will be related to the inflation costs, industry sources say.

Service charges across most freehold locations in Dubai have remained within range in the last two years, even as the property market recorded sharp spikes in rentals and property values. The authorities have during this period made it clear that every attention will be paid to keeping property owners’ costs in check.

But homeowners may soon need to get their accounts right if they have service charge dues to pay off. Continued failure to do so could impact defaulting homeowners’ credit scores, in the same way that any missed payment deadlines on bank loans or even telephone/utility bills. OA management companies and the Etihad Credit Bureau have been in talks to get non-payment of service charges too to be included when computing a UAE resident’s credit ratings. (A decision either way is imminent, according to property market and OA sources.)

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There are mixed reports on where service charge collections stand. Some in the industry say there was significant improvements in the first-half but that payments of dues tailed off from October onwards. According to Saeed Al Fahim, CEO of Stratum, one of the biggest OA management firms in the UAE, “With regards to collections, litigation processes in place have allowed for greater due paybacks. We are hopeful that with oversight from the Dubai courts and - hopefully - with reporting by the Etihad Credit Bureau, that collections increase further. The property management industry is moving towards normalization after consolidation in 2022 where some mid-sized OAE managers were bought out.”

Saeed Al Fahim
Saeed Al Fahim of Stratum Image Credit: Clint Egbert / Gulf News

Service charges in prime locations

Though there were reports of some OA companies raising services charges unilaterally, across most locations, any changes during 2022 were kept to a tight range by the Land Department. Under recent rule changes, the Land Department along with third-party audit committees set the service charges for a particular building or community at the start of each year. They do take feedback from the concerned OA companies, by the final word belongs to the DLD.

This way, the authorities have sought to reduce the influence of developers and their associated OA companies from setting service fees. To a great extent, this has worked well.

“Service charges on a per square foot (psf) basis are only higher for newly handed over developments at the time of submission of the first budget,” said Sameer Lakhani, Managing Director at Global Capital Partners. “For existing developments, 2023 budgets are to be strictly monitored by RERA, and can only be amended if OA board members change and/or through the introduction of new services in managing the property.

“For older mid-income communities that have not seen the price gains witnessed in the luxury sector, this has been somewhat of a relief for landlords. Given the spate of property developments being handed over in 2023, facilities management (FM) companies should be able to get a reprieve. But the challenge will remain to maintain the integrity of the asset in older developments.”

Ali Tumbi of Aqua Properties Image Credit: Gulf News Archives

Higher FM costs, lower collection

By end 2022, the OA industry had managed to get a partial handle on the collection situation. Through 2020 and 2021, the mounting dues from property owners was the biggest issue OA companies were dealing with. Tougher measures through the Rental Dispute Settlement Court under DLD managed to tilt the balance slightly towards OA companies. But the real punch will come as and when non-payment of service fees end up impacting property owners' credit scores.

According to Ali Tumbi, CEO of Aqua Properties, homeowners too - at least a good number of them - have realised payments need to be made for the upkeep of their properties and community. And that doing so adds value to the property. "Generally, homeowners have definitely got more say overall now, as there is more awareness and in communities which have been occupied by end-users," said Tumbi. "Developers have transitioned out and don’t need to be involved once the community is fully occupied."

On 2023 trends, "For new buildings, there is definitely an increase of new OA management companies prospecting to the get the business. There is always room for new people to join and grow. We see a gradual increase in service charges' cost to continue from inflation - but not a drastic increase."

Aayush Puri of Anacity Image Credit: Supplied
If it’s not the actual property value, it is the service charge levels that in one way or the other dictate a buyer’s decision. (There is also the matter of rising mortgage rates, but that’s another story.)

The belief in property circles is that service charges in 2023 will remain broadly in line with the last two years, as the authorities try to make sure cost inflation does not end up deterring a potential home buyer.

So, how would service charges for 2023 fare? To get a drift, Gulf News spoke to Aayush Puri, Head – GCC Operations at Anacity, which is building up an impressive portfolio of managed properties in the UAE. (Anacity is the subsidiary of Mumbai-based Anarock, the property consultancy.)

Dubai will see a near record-breaking handover of freehold homes this year. At least on these buildings, do you reckon that service charges could remain intact for the first 3 years or so?

Many potential buyers in Dubai are understandably concerned about the potential costs associated with owning a property - such as service charges. In the current market, it is possible that service charges on freehold properties in Dubai could remain unchanged for the first few years after handover, as developers attempt to reassure buyers by offering fixed service charges for a duration of three to five years.

Some developers may also choose to absorb these charges themselves in order to attract buyers.

It is worth considering that the decision to offer fixed service charges for a specific period is ultimately at the discretion of the developer, and may vary between projects. Potential buyers should carefully review the terms of any fixed service charge agreement and be aware of any potential changes that may occur in the future.

Many property owners, prospective ones, are talking about high service charges – and the fear that these could increase further. Are these concerns out of place?

It seems that these concerns may be unfounded, as service charges in the city have remained relatively stable. According to property management firms, while operating costs have increased significantly, they have been able to manage the situation so long as they are able to collect 70-75 per cent of service fee payments.

One factor that may contribute to the stability of service charges is the Real Estate Regulatory Agency (RERA), which has been working with Owner's Association Management (OAM) companies since 2019-2020 to reduce annual service fees collected by them.

As a result, many locations in Dubai have seen cuts of 10-15% on facilities management costs, which are often passed on to property owners. Additionally, software companies such as Anacity are helping OAMs identify ways to optimize operations through increased efficiency and cost savings.