Strata Law to boost realty business

The Strata Law, which has recently been expanded to all of Dubai, will force facilities management firms to improve their performance and boost the sector as a whole.

Traditionally, facilities management companies were employed by the developer to manage common areas of the buildings.

The developer could pass on the costs to the owners of the building, who despite forking out the money often had no say in the quality of the service being provided or the charges being levied.

However, this is now set to change with the expansion of the Strata Law, which up until March 31 used to apply only to the Dubai International Financial Centre.

Experts say the move will transform the industry and lead to higher quality and better managed buildings. Figures released earlier this year by the Middle East Strategy Advisors showed that the facilities management industry in the Gulf will be worth more than $892 billion (Dh3.2 trillion) over the next 25 years. Thanks to Strata Law, the UAE's share of this is set to be worth $704bn, with the markets in Saudi Arabia and Qatar following at $96bn and $92bn respectively.

James Garbutt, senior vice-president of facilities management specialists Spectrum, told Emirates Business: "Facilities management covers a very broad range of services that are required to run, maintain and manage a property. Historically, buildings used to be maintained by caretakers and maintenance workers, but with the realisation that buildings play a big part in economic growth and investment inflow, more focus is being given to their asset performance.

"In the life cycle of a building, it is normal for 20 per cent of the cost to be expended during construction and 80 per cent to be expended after it is completed.

"With this greater understanding of the property market, facilities management companies, who specialise in providing the range of services required to deliver best value during the operational stage of the building, have evolved and this sector of the real estate market is developing rapidly in Dubai."

To a large extent the law is responsible for the development of the facilities management market as it sets out a set of rules for management, operation and maintenance of joint parts of the property.

These areas are often referred to as common or shared areas and exist within multi-owned property.

Factors such as building fabric, services and utilities within these joint areas need to be properly managed, looked after and paid for to protect the asset value of the property. The law sets out the framework for the establishment of an owners' association, which gives owners the responsibility to manage and look after the joint parts of the property.

Experts say this will benefit the end users as in the earlier system it was not uncommon to find service charges that were either high without enough service delivery or were low leading to poor service and deteriorating asset value.

Owners of the apartments often had no control over this and just had to accept what was being done or not done.

Garbutt says: "With this new law, the owners form an association that can utilise the facilities management companies to act on its behalf. So facilities management companies will have new clients with a greater interest in the running, operation and maintenance of the property. Therefore, firms will have a bigger incentive to perform well and since service charges and accounts will not be paid by the developer but managed by the owners' association, the firms will have to be both competitive and transparent about the costs and the profits they are making.

"This is already shaking up a number of the facilities management companies in the market and I am sure we will see an increase in more professional, efficient and well-managed companies, while others who cannot perform will suffer. This can only be a good thing for the long-term sustainability of the facilities management sector and in the best interests of Dubai's real estate market."

Not only are consumers set to benefit, the companies themselves are going to get a boost as business starts rolling in.

Garbutt says: "My company has seen a significant rise in business since the arrival of the new legislation. This has been mainly been from developers who have realised their obligations and now seek our advice to set up owners' associations and strategically reduce their costs, while remaining responsible for the running, maintenance and management of the building until all units are sold.

"We have also seen a greater emphasis on our facilities management consultancy services during the design phase of the developments so that when buildings are completed they are built better, run better and cost less.

"I put this down to the fact that in a competitive market, developers who can deliver a building that is built to a better quality, can perform well and costs less to run will now be more attractive to other investors and achieve a higher return on their investment."

Apart from the boost to the facilities management business it will lead to better managed buildings in the long run, even if the consumers will have to bear the costs.

This is because any services contracted by an owners' association will be passed on to the consumer or apartment owner. The owners' association must budget for the day-to-day maintenance of the common property and recover these costs by way of the service charges. The associations will contract specialist service providers for management, cleaning, security, lift maintenance, recreational facility maintenance, parking control, maintenance of common property gardens grounds, access driveways and security gates.

The general fund will recover service charges from owners to fund expenditures such as building insurance premium, FM contract services, owners association management services, Dewa and other municipality charges.

Adrian Quinn, chairman, Essential Strata Management, said: "All the costs of running an owners' association will be passed on to the consumers as soon as the developer hands over control and title to them as there is no one else to pay for it. The law is specific in requiring all owners' associations to save for long-term capital replacement via a 10-year reserve fund. It requires a professional general manager to be appointed and a board of seven owners to hold and run a building like a large corporation. The board will be responsible to ensure that all the life safety equipment is properly maintained and all maintenance issues are attended to in an efficient and timely manner. So even though consumers will bear the cost, the positive side is that it will allow buildings to look new for a long time."

Experts say facilities management firms in Dubai need to improve their performance as currently only a few of them are capable of handling large buildings.

Quinn said: "The essential thing here is the employment of companies that have the experience in managing large buildings. There are many new companies coming into Dubai but their experience is only in small low rise developments although they are claiming they can manage large properties.

"The complexities of a small development versus a large development require specialist skills and systems to ensure all owners are protected. We have seen it time and time again in Australia, with buildings being set up wrong and as you cannot easily change it the owners' association will have to live with the mistakes."

Q&A: Peter Crogan

Peter Crogan, CEO, BCS Strata Management Services, sat down with Emirates Business and answered a few questions about Strata Law, which has been expanded from Dubai International Financial Centre to all of Dubai from April 1.

What is Strata Law?

The Strata Law will provide a legal mechanism for the transition of jointly held property from the developer to the owners as well as regulations that will ensure the ongoing maintenance of the owner's investment in that asset. In accordance with the new law, owners, through the establishment of an association, will take responsibility for the management of their buildings and communities and common property. The new law will define the rights and responsibilities of the owners' association and each owner and occupier living in these jointly owned properties. The law will also make the provisioning for the long-term maintenance of the buildings and common property mandatory by the introduction of a reserve fund. This is a fund in which owners will be required to contribute, to ensure sufficient capital is raised in the long term, to allow for necessary major works and maintenance of capital assets. This fund will be additional to the already established general fund that takes care of the day-to-day maintenance and management requirements of an owners' association. Owners will have a shared interest and responsibility to maintain their investment.

What are its regulations?

While the new law is now in effect, its regulations are yet to be finalised. A draft of the regulations has been issued for discussion purposes among all the stakeholders and it is expected to be finalised soon. The regulations provide for detailed procedures on how the law will operate. They define the establishment of the owners' association, its powers and functions, how its management board is elected, what budgeting and financial reporting is mandatory, how and when the owners' association meetings are conducted, how service charges are calculated and issued, debt recovery procedures, what insurances are mandatory and what records must be kept.

How does the Strata Law affect developers?

Developers when preparing "off the plan" sales will have to provide a range of disclosures to prospective buyers. These disclosure statements among other things will include a budget for the general and reserve funds with proposed service charges for a two-year period, a schedule of material finishes for both the common property and the proposed unit, arrangements for the supply of utility services, intended land use within a project, what facilities will be available to owners and occupiers, copies of the proposed Master Community Declaration, which contains the owners' association community rules and estimated dates for completion. The law also requires developers to lodge a Master Community Declaration with the Lands Department to formally register the project. This document provides the owners' association detailed information on the size of the development, the size of the apartments and numbering of apartments.

How will it affect owners and end-users?

The purpose of the law is to provide the right regulatory environment to ensure owners and investors in Dubai can act with confidence that there is a regulatory structure in place. The new law will enable owners to participate in the management of their assets to ensure that right management practices are in place.

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