Cost-cutting measures help reduce service charges

Renegotiation of facilities management service provider contracts and other cost-cutting measures taken by developers in Dubai are resulting in decreased service charges across buildings and communities, Emirates Business has learnt.

According to Emaar: "All our communities have seen an overall reduction in the community service fee budget for 2009 in comparison to the previous year. The decrease in community service fee is primarily due to various cost-cutting measures undertaken and renegotiation of service provider contracts in the last quarter of 2008. We have also taken into account several ideas and initiatives suggested by our volunteer owner committees, which have contributed to efficiencies and cost-saving initiatives."

Emaar's current community portfolio includes Emirates Living, Dubai Marina, Arabian Ranches and Downtown Burj Dubai. "The community service fee varies with projects. All charges are determined by historical and projected costs and in keeping with the requirements of Rera [Real Estate Regulatory Agency]. Typically these charges are reviewed by owners committees in the community prior to they being finalised. The service fee accounts are audited by an independent third party chosen by the owners committee. The service charges are based on Rera guidelines," said an Emaar spokesperson.

In June this year, Nakheel, the real estate arm of Dubai World, lowered service charges for its Discovery Gardens development in agreement with Rera. Following a review of its own budget and that of its suppliers, Nakheel dropped service charges in Discovery Gardens by Dh5 per square foot and further backdated the new service charge from January 1, 2009, with any rebates for householders being credited against next year's service charges, effective October 1, 2009.

Abdulrahman Kalantar, Managing Director of Nakheel Asset Management and Design (Namad), said: "When we first set the service charges for Discovery Gardens, they were based on our best estimates for this new Nakheel community. Following a lengthy review, we have been able to take advantage of recent reductions in the cost of goods and services, which has in turn reduced our overall service charge budgets. We're delighted to pass on these cost savings to every homeowner at Discovery Gardens."

"Across Nakheel's developments, each year's service charges are budgeted according to projected costs, and all accounts are independently audited to ensure accuracy and transparency for homeowners. Any savings made are passed on to unit owners," said Kalantar.

For Dubai-based private developer ETA Star Properties, there has been no significant drop in service charges. "Our maintenance charges are very competitive and efficiently managed and we have not recorded any significant drop in maintenance charges," said Mohammed Ali, General Manager, ETA Star Properties.

"In Palladium, the service charges are Dh12 per sq ft and in Liberty House the service charge is Dh15 per sq ft. We have a facilities management group called Emco, which has been maintaining all our facilities management (FM) contracts.

"Since the handing over of Belvedere, about three years ago, we have adopted an open-book policy for our customers. Usually we have the annual budget, which is approved by owners in an AGM, and at the end of the year, the audited accounts are presented in the next AGM and any surplus / deficit is collected from owners and adjusted in the subsequent years' budget. As per our understanding, Rera's guidelines also revolves around the above mentioned trade practice, which will actually be formalised once the Strata law is implemented.

"In the past three years, post handing over the projects, we only had to make an additional provision for repairs and replacement in our Belvedere project," said Ali.

ETA Star confirmed its service charges have been set according to Rera guidelines.

Mohammed Nimer, CEO, MAG Properties, said: "From 1999 to 2006, every developer and service contractor had his own vision in place for service charges especially since there was no law then for service charges. When Rera started regulating the market there were two kinds of developers, those who maintain their buildings by themselves and others who outsourced companies to take care of their properties."

"Developers who had set high charges prior to Rera regulating the service charges are reducing charges today. But developers who were reasonable and had competitive service charges have not made much of a difference in value even after Rera regulated the market," said Nimer.

Defining the difference between a maintenance charge and a service charge, Ali said: "Service charges, also termed as property management charge, usually include maintenance charges and management fees. The larger portion of service charges is the maintenance component. Maintenance covers the cost of maintenance of common areas and common equipment of the building. It also includes the cost related to utility service of common areas."

Nimer said: "Overall, about 50 per cent of the service charges go towards running the common areas of a building or a community such as cleaning common areas and the remaining 50 per cent is for running the building. Maintenance charges are only part of the overall service charges."

He said: "Maintenance is part of the whole operation. The first year after a building is handed over, any deficit in the building and common areas will be covered by the developer. This is called the defects liability period (DLP)."

"Once the building is handed over, the owner associations take over the maintenance. During the first year the developers set a fixed service charge for the maintenance of the building and then the service charge is based on actuals set by the owner association," said Nimer.

Ali said: "As per our current business plan, we maintain and manage our newly handed over buildings for two years from the date of handing over.

"Beyond two years, the option is left open and decision is made by the home owners association to choose a company to maintain the building."

"All our buildings are managed by a professional facilities management company that is outsourced. The current facility management company in all our buildings is Emco, which is part of our conglomerate. This company was bought into the system three months prior to the handing over and was made responsible for the management of the building, post handing over," said Ali.

According to MAG, six months' time is given for owner associations to be formed from the time of the handover.

"That committee is like an entity and has its own separate bank account. Developers have to maintain buildings for one year and in the first year the owners association is formed," said Nimer.

MAG 214 is the only building that has been handed over so far – about 22 months ago for MAG Properties. "Ultimately we are looking to have our own property management division. We have taken this decision so as to do property management for ourselves. In the beginning we will extend our services to only MAG properties and later we might look to extend services to other developers as well," said Nimer.

Meanwhile, Nakheel said the master developer is ready to register the owners association in Discovery Gardens and is prepared to help with the formation of a committee.

"We are ready to register the owners association and we are prepared to help with the formation of the association and the creation of a committee. It's important to note that at this point it is not possible to formally register the owners association (OA).

"Although the Strata laws came into effect in April 2008, additional details on disclosure requirements, meeting rules, election of committee, etc, are being finalised by the Dubai Land Department. Once these are finalised, we will proceed to register each OA with Rera and conduct the meeting to elect the owner committee in accordance with the expected regulations," said Kalantar.

For its projects Belvedere and Palladium, ETA Star already has volunteers who represent the home owners committee. "This committee will be formalised as a home owners association on the implementation of the Strata law," said Ali.

"As per our understanding of Rera guidelines, the proposed Strata law requires a strata manager to be appointed for managing the buildings and the strata manager reports back to the home owners association."

Emaar said: "We welcome the creation of owners associations and were one of the early developers to have our community management team certified by the US-based Community Associations Institute. We have more than 13 owners committees, as legal associations can only be formed once the regulations under Law 27 of 2007 have been released.

"We have always incorporated facilities management in our projects during development, transition and handover. Once the project has been handed over, a facilities management service provider is chosen through competitive tender. When an owners committee exists, the tender process is reviewed with the owners committee."

"We encourage our residents to actively engage in management of their community," said the Emaar spokesperson.

All developers are awaiting the Strata law to be finalised, which will legalise owners associations as a separate entity.

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