Dubai: Home owners in Dubai may finally be in for respite on their sky-high service charges.
Local authorities have been sounding out developers, owners associations (OAs) and their management companies, as well as service providers, to come up with solutions in setting service charges, especially those related to district cooling.
Such an intervention could be the only way to tackle an issue that has been vexing property owners for years now, and which always seems to ratchet up during the long, hot days of a Dubai summer.
In fact, the Real Estate Regulatory Authority (RERA) did just that earlier this month to cool off tensions that arose at Motor City between residents and service providers.
RERA has asked all concerned to do a review of district cooling charges, and we believe it wants to see a reduction in service charges.
There have been other instances when the regulator has had the final word. But market sources say RERA should not stop with case-by-case interventions, but ensure a more permanent fix. Ali Tumbi, CEO of Aqua Properties, reckons this is already happening.
“The regulator realises there is a problem. You can’t have a situation where rents keep falling and service charges are still at same levels… or being pushed higher,” said Tumbi, who also operates HOAM (Highrise Owners Association Management).
“RERA has asked all concerned to do a review of district cooling charges, and we believe it wants to see a reduction in service charges.”
Typically, service charges make up 15-20 per cent of the rent a property generates. Rents have dropped by 25 per cent over the last two years, but service charges have hardly seen a dent.
Property value
That leaves property owners with a problem: “Their net income from the asset is down by an average 30-35 per cent as an effect of the unchanged service charges,” said Tumbi. “This is impacting the yield owners can generate and in turn hits the capital value of the property. That’s never good for the market.”
Whether the expected change will happen depends on how district cooling companies respond. In the past, they have defended their rates, saying any increase has been brought on by natural cost inflation. District cooling providers believe they cannot be penalised and forced to cut rates due to the market situation.
15-20 %
of the rent a property generates are used to pay service charges.But it is a fact that the state of the real estate market has forced all concerned to have a relook at how service charges are structured and whether they need to change.
There are some who believe any change should go much deeper, and that would mean empowering OAs to do what they were set up for. A first step would be to assign OAs with full legal rights.
“The [existing] laws are fine - but Owners Associations need to be established as legal entities in their own right,” said John Stevens, Managing Director at Asteco Property Management. “As it stands, if the OA has an issue with the developer, it can raise them with the developer but has no real power to address them.
“For example, if the OA identifies a defect in the property and the developer doesn’t address it, what can the OA do? If [it is a] registered entity, they could directly proceed with a case against the developer and contractors.
“If not, then they are at the whim of the developer. OAs only exist on paper, with “Interim OA Boards” being the entity that represents Owners Association.”
Dispute resolution
In the current framework, RERA has the final word in signing off on OA’s annual budgets, which are the funds collected from property owners and used for the upkeep of common areas, with some of it in the “reserve/sinking” fund for future use.
But in cases where there is a disconnection of common area services because of non-payment of fees, it could be a “matter for the police or local courts”, said Nasser Malalla Ganem, Senior Partner at the law firm of NM Associates.
Do OA laws need updating? “Laws are being updated on a continual basis — most of these are done to resolve or clarify issues arisen in real time,” said Ganem. “This is likely to continue as best practices are both imported from other markets as well as local norms modified based on laws of the land.
“But it is highly unlikely that JOPD (jointly-owned property developments) in the freehold sector are operating without OAs, as this is explicitly embedded in Dubai laws,” he said.
‘Fixed’ service charges are nothing more than a promise
Dubai: Some developers in Dubai are offering “fixed” service charges for three- to five-years as part of their sales promotions.
“It’s a marketing gimmick,” said Ali Tumbi, CEO of Aqua Properties. “Utility (electricity and cooling) costs make up around 30 per cent of property maintenance charges in Dubai. If utility rates go up during this 3-5 year period, even by 5-10 per cent, property owners cannot escape paying the higher service charges, whatever the promises made to them.
“Or they should get their developers to pay cost increases in their service charges during that particular period… and they must insert this in their sales contracts. That’s the only protection [for property owners].”
It is not clear whether developers are willing to make such commitments in writing. Or they could put in provisos in their contracts to ensure they don’t get hit by sudden expense claims from their buyers.
At the end of the day, such promotions are nothing more than a promise. “Given the trajectory service charges are taking, these promises might be unfulfilled,” said Uzair Razi, Chief Investment Officer at Global Capital Partners.
“RERA (Real Estate Regulatory Authority) has focused its attention on OA budgets, which implies that OAs will be unable to get away with unscrupulous practices. That’s healthy for the market.”
Putting a squeeze on service providers
Dubai: Owning a home in a glass-sheathed high-rise comes at a price… and not just from the cost of buying an apartment there. Property owners will also need to be keep in mind the service charges they end up paying.
At some of the city’s signature towers, service charges are now well upwards of Dh50 a square foot. Add those up, and it represents a significant outgoing for the owner. More so, as they definitely are not getting the rental returns of 2015-17.
One solution would be to get facilities management (FM) companies to cut what they charge the Owners Association. “Depending on the state of the building, pressure has to be exerted on FM companies to reduce their costs,” said Uzair Razi, Chief Investment Officer at Global Capital Partners. “This is done both through proactive measures - such as preventive maintenance contracts - as well as reactive measures such as negotiating contracts with their competition to bring down the fees.
“This is happening across the industry, and part of the ‘discounting” we are seeing in other sectors. The impulse to squeeze costs will continue and depending on the asset, will result in varying degrees of success,” said Rizvi.
