Dubai property owners are caught in the twin-grip of declining rentals and unsustainably high service fees being charged by developers, pushing their return on real estate investment further down.
Maintenance fees at some locations, including for Downtown Dubai and the Burj Khalifa tower in particular, are as high as 45 per cent of the annual rentals, further adding to the woes of investors who have seen valuations of some of their properties decline by almost 50 per cent over the past couple of years.
For instance, service charges for the current year in Burj Khalifa has been established at Dh52.77 per sq ft for residential units.
This website recently broke the news about Studio apartments in Burj Khalifa now renting out at Dh80,000 per year.
Based on the average size of studio apartments in the tower (553 sq ft), the service charge works out to more than Dh29,000 per year, or over 36 per cent of the rental yield.
Rental yield is even lower for an average one-bedroom apartment in the tallest tower in the world, with a one-bed apartment of size 986 sq ft renting out for Dh120,000 while the service charge works out to more than Dh52,000, or over 43 per cent of the annual rent.
Service charges as a percentage of the annual yield have ballooned as rents continue to decline, forcing investors to frequently recalculate their RoI.
Industry experts blame a lack of initial transparency over the cost of maintaining a building and speculator frenzy for these woes. "The high fees were set in a hot market and buyers simply had to take it or leave it. Many of the people that bought did not intend to live in the properties - they were planning to sell before ever paying a fee and therefore did not care what the fee was," Kosta Giannopoulos, Manager Residential Sales and Leasing, Better Homes, told Emirates 24|7.
According to a survey done late last year by Dubai-based real estate broker Harbor Real Estate, the average annual service charges for buildings across Dubai are Dh16 per square foot.
"The highest service charges recorded were in and around Downtown Burj Dubai at about Dh22 per sq ft, while the lowest were in the Greens at Dh11 per sq ft," Harbor Managing Director Mohanad Alwadiya had then said.
"Investors and owner-occupiers alike are starting to evaluate very carefully the impact of service charges on the financial performance of their property and their own personal wealth," he added.
While rentals have continued to decline since, the maintenance fees charged by developers hasn't, forcing yield further down.
"Downward pressure on leases continues across virtually all areas of [Dubai]," consultancy CB Richard Ellis said in its latest Dubai MarketView report. CBRE said average rental rates for one, two and three bedroom apartments across the 12 locations it surveyed "have dipped by an average 13 per cent on a quarterly basis, whilst on an annual basis they have declined by 18 per cent."
According to CBRE data, "[t]he biggest drop has been for one bedroom units with a 20 per cent decline. This can be attributed to the relocation of tenants to bigger unit types as lease rates have fallen away and become more affordable."
The high service charges, nonetheless, are justified from the developers' point of view in case a building is unique and requires high maintenance, such as the Burj Khalifa. "The service charges will differ greatly depending on the building or development - this is because the common areas differ so much," said Better Homes' Giannopoulos.
Nevertheless, there are other reasons why charges remain high. "I think there are a number of reasons why service fees are high," she added.
"Some communities have lavish common areas that cost a lot to maintain," she said. Another reason is that, earlier, "developers had a monopoly on service provision and so could charge whatever they wanted (it also didn't help that the owners were not able to see audited accounts of what the money was being spent on)."
Then again, investor speculation is to be blamed as well. "The high fees were set in a hot market and buyers simply had to take it or leave it. Many of the people that bought did not intend to live in the properties - they were planning to sell before ever paying a fee and therefore did not care what the fee was," she said.
According to Giannopoulos, other factors that affect the service charge include:
- How many units are there in the project
- Is there a swimming pool (or more than one)
- How many elevators are there
- Are there lush gardens?
- Are there water features etc?
- What type of MEP equipment is in the building
- Do the windows need to be cleaned by use of a cradle?
Moreover, experts reckon that chiller expenses for small developments are not cost-efficient, and result in a higher per capita charge. "Besides, there certain developments that aren't fully delivered but the chiller is operational to service the parts of the development that are ready and delivered. This results in a limited number of owners to foot the bill for the entire development," said an industry expert who did not wish to be quoted.
When asked if there was an ideal rent-to-service fees ratio, Better Homes' Giannopoulos said that the two remained independent though interlinked. "There is no ideal ration of service charges to rental income because the rent that the market can achieve is not related to the cost of maintaining a development," she said.
"The most important thing is that an experienced and qualified strata management company is employed to make sure the service providers are employed on a competitive basis and are held accountable for the services provided and to ensure that the required work is done as efficiently as possible," she advised.
"The residential sector is expected to feel further aggravation during the fourth quarter of 2010 and the first quarter of 2011, with completed properties awaiting entry into the market from the developments of Business Bay, Dubai Sports City and Jumeirah Village," CBRE said.
With rentals likely to remain depressed for the next couple of quarters, continuing to make mortgage payments may not be Dubai landlords' only concern. They may have to find out a way of fulfilling service charge commitments as well.