The drop in service fees in Dubai’s 11 freehold locations is creating a positive impact on real estate investment, however, the key challenge according to property analysts is the market’s ability to maintain facilities management (FM) costs at sustainable levels. According to the Dubai Land Department (DLD), service fees dropped between 1 per cent and 12 per cent over the last 12 months, based on data from co-owned properties. Two communities that saw the highest decline in service charges this year (excluding district cooling and electricity fees) are Dubai Marina, where rates went down by 12 per cent from Dh6.81 per square foot in 2017 to Dh5.96 this year, and Jumeirah Beach Residences, which saw an 11 per cent decline from from Dh4.51 in 2017 to Dh4.01 this year.
“It is essential that management companies and owners’ associations provide all financial details to a certified financial auditor registered to the Real Estat Regulatory Agency [Rera] to conduct an audit of service fees,” says Lewis Allsopp, CEO of Allsopp & Allsopp, noting the importance of transparency in keeping rates in check. “It adds clarity and confidence to the real estate market as investors know they are not overpaying for such services.”
Co-owned properties are apartment buildings where there are communal areas such as the lobby, lifts and swimming pools. “Elements that are included in service fees in co-owned properties vary, but mostly consist of elevator maintenance, swimming pool maintenance, cleaning of communal areas, sinking funds and cladding and roof maintenance,” Allsopp explains. “Buyer confidence is increased with the knowledge that the service and upkeep of co-owned properties are monitored to ensure that the most efficient contractors are used to carry out any work that needs to be done.”
Service charges are also key when investing in property: higher fees mean lower yields, making the property less attractive for investors. Rakesh Mirchandani, director at KGR Real Estate, says a competent management company is vital to maintain the quality of services and the overall cost of maintenance. “The average service charges in Downtown Dubai and Dubai Marina are the highest,” says Mirchandani. “The lowest would be in areas such as International City or villa and town house developments.”
When trying to reduce service charges, Mirchandani says action plans will differ depending on the age, design and type of building.
Apart from keeping costs down, another critical challenge facing FM companies is the collection of service charges itself. “It can be challenging for some as many of the owners live abroad,” explains Mario Volpi, sales and leasing manager of Engel & Volkers. “Owners also share mistrust about how the management company is run, blaming expensive contractors or inefficient services.”
Therefore, the regulation requiring facilities managers to file financial reports to Rera is a massive leap forward for transparency. “It gives both investors and end users a clear indication of how the money is spent and where other savings could be made,” says Volpi. “It effectively shifts the power from management companies back to the individual owners.”
Good governance and control
Rera, for its part, has posted a summary of service fee data for all co-owned properties on its website. It has also required all FM employees to undergo specialised courses by the Dubai Real Estate Institute (DREI), the educational arm of DLD.
“Even most sophisticated global cities around the world do not have the governance that Rera has implemented over service charges,” says Fadi Nwilati, CEO of Kaizen Asset Management Services says. “Many investors believe that the management company or the developer decides service charges. However, they do not understand the number of detailed audits that a management company goes through to both set up the budget and to make sure the running costs of properties remain within budgets.”
Understanding service charges
Service charges, as well as overall property maintenance fees, are expenses associated with any real estate investment. “The more you can push these costs down, without affecting quality, the higher the return on investment and property yields — making an investment more attractive,” says Fadi Nwilati, CEO of Kaizen Asset Management Services.
Service charges have two main elements: a general fund and a reserve fund. “The reserve fund or the sinking fund is a yearly amount that accumulates, which is based on a study by a third-party consultant,” says Nwilati. “The reserve fund study covers a long-term analysis of major equipment, repairs and other items that will need to be replaced over the long term. For example, the cost of replacing chillers after 15 years. By accumulating this amount over the years, the investors can be comfortable that when the time comes to replace major items in a property, there are enough funds.”
The general fund covers only the running expenses of a property for 12 months. “Running expenses are utilities, maintenance, cleaning, security, insurance and other yearly expenses,” says Nwilati. “Typically, in Dubai a significant portion of that, in some cases 50 per cent, is paid directly to utilities, namely electricity, cooling and water. Rera makes sure that tenders for such services are done at arms length, and auditors [ensure] the service charges have been used for the particular costs associated for the specific year.”