Realistic service charges 'keep old buildings safe'

Keeping service charges at realistic levels is a desirable practice to keep old buildings intact.

Owners have been told that levying low services will accelerate deterioration of the buildings.

"Some owners in Dubai do not see the value in maintaining buildings, which can lead to the deterioration of the building," said a strata management company official.

"As some developers in Dubai are seen as 'gouging' service fees, investors are unable to see the value of money and are hence withholding payment of service charges until the developers can justify the service fees being charged," said Nima Khanpour, Commercial Director, Stratum Owners Association Management.

Excerpts from an exclusive interview.

With the establishment of the Strata guidelines, are the Owners' Associations (OA) in Dubai a legal entity?

Owners' Associations (OAs) are unregistered and those that are in operation are operating as interim OA's and as such the developer remains responsible for the collection of service charges from unit owners, the provision of ongoing maintenance of the common areas and payment of accounts.

Q Why has it not been easy to see 100 per cent service fee collection?

There has been a range of issues encountered by developers that has created difficulties in the collection of service charge levies, which in some developments have service charge arrears (outstanding) with up to 60 per cent of owners.

But there must be some reasons. What are they?

Unit owners are becoming more aware of the impending Jointly Owned Property (JOP) Law and the implications of self-determination and as a result are demanding a breakdown of expenses from the service charge account and justification of the level of the service fees before they are prepared to pay.

Further, some developers in Dubai are seen by owners in their developments as 'gouging' service fees. As they are unable to see the value of money they are withholding payment of service charges until the developer can justify the services fees being charged.

Moreover, the global financial crisis left a proportion of unit owners unemployed and short of cash and as a result they are unable to pay their service charges. This is particularly the case where the purchase was made on the basis that the rental income (which has been substantially reduced due to high vacancy factors) would meet the holding costs.

Many investors are unable to obtain the rent they were expecting or promised due to developments being "incomplete" with regards to facilities, particularly where the development is part of an incomplete master development where, as a result of the financial crisis, development has slowed down considerably or stopped completely.

Some owners are withholding charges pending the registration of the Owners' Association when they will be able to have a democratic vote in the service level required and the service fees payable. Some unit owners are comparing their service fees with other buildings, which in many cases are not directly comparable because of the different level of services required between developments. Many owners are not getting the services they expect or think relative to the amount of service charges being levied.

Another issue where owners see the same charges year-on-year without any reduction or proof of value – which means that they see no real management for their development and thus a lack of justification for raising "high" service charges.

Do you believe the new strata guidelines will help improve the service fee collection in Dubai?

From a practical perspective, the new guidelines for maintenance fee collection are expected to be difficult to enforce as no precedent has been set, as no case has yet gone to litigation.

Moreover, litigation is expensive and court fees are not recoverable.

What are the challenges being faced by OAs today in Dubai?

The full challenges of OAs is yet to be met until they are registered with the Real Estate Regulatory Agency (Rera) and become fully operational as self-managed legally independent entities appointing a competent and experienced OA manager to assist the board members to manage the OA's affairs.

The challenges will increase with the OA manager's ability to explain, assist and guide inexperienced board members to fulfil their obligations by maintaining the development and the level of service the majority of owners in the development require and in convincing the owners that proper maintenance is a far better option for the long-term return on their investment than no maintenance or minimal maintenance.

Are OAs constantly striving to keep service charges at low levels?

This is an ongoing problem worldwide as some owners, for their own reasons, want to keep service charges to an unrealistically low level as they do not see value in maintaining the building, which can lead to the deterioration of the building. Some owners, however, see the long-term benefit of keeping service charges and as such try to maintain a better level of service by being proactive with their maintenance plans to prevent breakdowns instead of taking a reactive stance and only rectifying problems after the occur.

From a practical perspective, day-to-day challenges will invariably arise for the OAs and will be typical of those encountered world-wide in community-based dwellings but are likely to be far more pronounced given the multicultural diversity of unit owners, the general lack of understanding of the jointly owned property law, cultural misconceptions in respect of the operation of the jointly owned property law (JOP) law and in particular the maintenance of up-to-date records to facilitate communication and the unusually large proportion of internationally-based owners who may not have had exposure to the JOP concept.

Are developers working towards keeping communication going with OAs?

Due to lack of maintenance of records of a building, some developers have broken down communication with some unit owners completely. As a result, service fees are not being paid as accounts are not being received and, when combined with the fallout of the overall economy, some developers have encountered significant cash flow funding problems.

This has further been exacerbated by non-payment of service fee levies, which has resulted in the necessity to reduce the level or in some cases terminate services provided in their developments and only maintain essential services such as lifts and chiller services.

Have the recent drop in service charges been as a result of FM charges dropping in the market?

While a small minority of developers are seen to have been maintaining an unrealistically high service charge model, majority of developers have been conscientious and have been taking advantage of the drop in facilities management charges that have arisen as a result of the overall fall in the economy. Global issues have provided the opportunity to obtain more competitively priced services. Also, the change in the method of operation of service suppliers being implemented by the Strata law is anticipated to provide the landscape for further cuts in maintenance costs through the calling of tenders based upon the OA's requirements and specifications.

While it is yet to be confirmed that maintenance providers will be able to provide more competitive pricing, based on Rera's directions, the change in the business model required is widely expected to enable OA's a better mechanism to compare "like for like" services by contracting direct with the service provider instead of with a master service provider who sub-contracts services, imposes an administration fee and effectively adds no real value to the end result.

With the introduction of the new guidelines, the landscape for maintenance providers will certainly change as each service provider will need to be licensed for their particular business activity and will no longer be able to operate under the old business model of subcontracting the work unless they hold licenses in each of the fields in which they are subcontracting which, under the old facilities management model, simply resulted in the addition of administration costs which added zero value.

One of the issues that appears to have been overlooked in the debate is that by engaging an experienced OA manager, the owners' association clients will over time be able to further reduce services charges if the OA manager is astute enough to take advantage of their position managing a portfolio of OA's by providing service providers with the opportunity of increasing their scale of services to many owners' associations in return for reducing their charges so that OA's will be able to take advantage of "bulk" buying power through the owners' association manager.

Experienced hand

Nima Khanpour is the Commercial Director of Stratum Owners Association Management and holds a Bachelor of Commerce degree in accounting and finance from Macquarie University in Australia.

He has more than 13 years of specialist experience in the real estate and finance industries.

As an integral part of the teams that developed major real estate initiatives in Dubai, Khanpour's main focus was co-ordinating between client's requirements and the implementation of such developments, as well as advising on strategic partnerships and creating ideal real estate opportunities.

Khanpour has been involved in the sale of properties worth $200 million (Dh734m) in the UAE.

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