Dubai: At a time when property values and rents across Dubai have been in decline for the last four years, there’s one cost element that kept on rising – service charges. And these days, it’s proving more than just an irritant for property buyers.
“Depending on the age of the building in a community, service charges have gone up between 10 and 25 per cent in the last four years,” said Uzair Razi at Global Capital Partners, a real estate consultancy. “This has coincided with rents falling by about a third during the same time period.
“Yes, the increase was in part due to inflationary pressures, but primarily on account of electricity charges as well as the higher cost involved with the upkeep of buildings that were historically not properly looked after the way they should have been.”
The increase in property service charges are primarily on account of electricity charges as well as the higher cost involved with the upkeep of buildings
Razi’s sentiments are being echoed across freehold communities and by property owners. This has led to often testy exchanges between them and developers, and with facilities management companies caught in the crossfire.
A landlord with a three-bedroom unit on rent at one of Dubai’s first freehold communities had this to say: “It’s unreasonable to keep hiking service charges when the market has seen such a rental contraction. It cuts into my returns and it’s starting to hurt.”
Increase in property service fees in the last 4 years
Now, this is a landlord who has owned property in Dubai through two market upturns and subsequent downturns. The burden of service charges can become quite tiresome for the new crop of homeowners, many of whom would be relying on the rental income to pay off the mortgages. To see rental income come down while shelling out hefty service charges costs can make them question the wisdom of such an investment.
Hurting investors in particular
Real estate agents say it’s not just property values and falling rents that potential investors are concerned about… there’s the fact that service charges haven’t dropped. For such property buyers, it’s all about the rental yield these investments can generate - 6-8 per cent is something they can live with. But when rents keep dipping and service charges don’t, then investors are more likely to hold back.
There have been sales lost because developers/owner association management companies couldn’t offer potential buyers the guarantee that if rents fall within a certain range during a year, it would be mirrored in some way on the service charges.
Reasonable rental yields sought after by property investors
Many are the tales of certain studio apartments in the more affordable communities now having rents that are “just a few thousands more” than what their annual service charges are. Investors who have been promised “robust” rental yields at the time of buying will not like it one bit.
A disincentive to buying
Developers in Dubai are hearing this hurt loud and clear. In recent years, they have tried to convince buyers by promising a freeze on service charge hikes for the first three to five years.
Has this worked in practice?
According to Prathyusha Gurrappu, Head of Research & Advisory at Core, the property consultancy: “We do see many developers continuing to offer waivers on service charges and Dubai Land Department fees as a way to attract buyers.
While service charges (by themselves) are not a significant cost, in a price-sensitive market, developers are using these waivers as a marketing tool to incentivise buyers
“While service charges (by themselves) are not a significant cost, in a price-sensitive market, developers are using these waivers as a marketing tool to incentivise buyers. And eliminate any barriers to entry by factoring in additional costs within the sale price.”
But Razi has doubts about whether such a tactic actually works: “It did not ‘click’ as there were numerous instances where these fixed terms were violated, which was another reason why regulation was subsequently tightened.”
RERA steps in
That’s right – late last year, the Dubai Land Department and RERA (Real Estate Regulatory Agency) came up with a complete overhaul of the way service charges are set in Dubai. Plus, on the ‘who and how’ freehold properties are managed.
This effectively empowered homeowners associations, with RERA stipulating that all new freehold projects have to set up homeowner associations if they are to get their completion certificates.
And RERA has taken direct control of service charges, setting up dedicated auditors to go through the budgets handed in by owner association management companies. They will have the final word on what a particular building can charge as service charge for a particular 12-month period.
Does this fill all the gaps?
It is still early days into the new regulatory regime, and market participants – and property owners - are keenly watching the emerging trends. If this helps place a ceiling on how high service charges can go, then it would have done its work… and convinced a new crop of property buyers that their interests will be taken care of.
By insisting on owner associations, property owners also have a direct say in the upkeep of their buildings. No longer will these be left to the whims and fancies of developers.
“A reworking of service fees that will be truly effective will involve the involvement of all stakeholders by way of homeowner committees,” said Razi. This will ensure “downward pressure is applied on costs and forces a proactive approach towards maintaining the asset.
“The non-payment of service fees had also become a significant issue, which is what the new law addresses in a far more effective manner.”
Cap ‘em and win ‘em
For property owners, it will be a relief not to have to shell out more on service charges each year. Trying to fob them off with this being for the greater good of their property will not wash any longer.
Service charges cannot remain immune to the dynamics of the property market at any particular moment in time. The Land Department and RERA have set down a marker for the future. It is time for the other stakeholders in the property market to join in.
What should be the ideal service charge component as a percentage of rental income?
Market watchers are undecided on what that split should be. Uzair Razi of GCP explains why: “It is difficult to give an average figure as the number varies depending on the services being provided for in the building (concierge services in luxury dwellings, for instance) and/or whether there is centralised cooling as part of the overall service charges.
“What we know is that across the board, the percentage of rent that is consumed by service charges has gone up significantly (partly due to exogenous forces such as rents falling), but partly due to endogenous factors such as cost hikes.
“This has been one of the primary reasons why the regulation has come in; to have active oversight of funds, which was in many cases not properly utilised and instead used for current expenditure.”