Dubai is one of the premier real estate markets in the world. It attracts both resident owners and investors; with high expectations around the standard of services and facilities in buildings. However, inconsistency in payment of service charges has the potential to undermine a lot of these strengths.

What complicates matters is that the issue involves multiple factors and interactions, across the entire spectrum of stakeholders involved, and on a case-to-case basis.

So, as the Dubai real estate market rebounds into a new era of growth; how does the industry ensure that the valuation and quality of properties are not compromised? In this report, CMtoday sheds light on a recent virtual discussion, where prominent spokespersons and stakeholders, across the entire array of industry stakeholders; were asked to consider the challenges involved, and gain insights into what can be done to address shortcomings.

The unintended consequences of service charge delays

Service charges, and what measures can be taken to streamline their payment, has been a hot topic,

over the previous year or so. In a period with multiple disruptions due to the COVID-19 pandemic, a significant decline in the collection of service charges spelled bad news for owner's association management firms, by restricting their pool of available funds, for the maintenance and upkeep of properties. The consequences of this shortfall are stark; both in the short to mid-term, as well as the long-term health

and competitiveness of individual properties, and the Dubai real estate market as a whole.

“There’s a larger issue to address here,” says Francis Giani, Chief Community Management Officer for Nakheel Community Management.

“Once a building has fallen behind on payments, the value of the property goes down. Owners

need to understand the impact of delinquent payments on the value of their property. A situation like this indicates a cash flow issue, which eventually starts to result in

value-added services like a concierge disappearing, and a snowball effect on leasing, and property value”.

Service charge shortfalls can also end up affecting necessary services and safety systems, in turn jeopardizing insurance coverage. Shortfalls also result in service providers cutting down on workforces – at least temporarily – or approaching the regulators and owners associations, to ensure compliance.

“As a managing agent you might be forced to dip into reserve funds, to meet obligations,” Naser Barhoum, Executive VP - Real Estate at Three60 Communities, points out. “Investors might not feel the harsher effects for a few months, but with the real estate market in Dubai rebounding, you will find that the upkeep of buildings has huge implications, in terms of preserving the asset value; so the effects can be very detrimental.”

Dr. Mahmoud Hesham El Burai, Senior Advisor at RERA agrees. “Managing agents need to be bold enough to use the tools that new regulations provide them. After a thirty-day period, a property can be blocked from sales and rental renewals, and owners who do not pay service charges can be restricted from being in owner’s committees, and so on,” says Dr. Mahmoud. “Education and awareness are one of the keys to regulators and managing agents having a productive relationship, in the interest of all stakeholders. We need to communicate to owners that the timely payment of service charges is critical to the profitability of their building, the markets, and the image of Dubai.

So why not put service charges on a regular cycle?

The elephant in the room - in the collection of service charges for buildings - is that they typically do not follow a regular cycle, in Dubai. Although they are meant to be paid quarterly, and in advance; they include some variable components, some that are fixed, and some that are ad hoc, in terms of when they need to be paid. 

“What differentiates the service charges people pay for their properties, is that some other regular payments people make – such as utilities – are variable, and based on usage,” Rachel Tudor, COO of MCM, elaborates. “So making the billing cycle for service charges consistent would require improvements beyond regulations or automation. For instance, we need to put in efforts to ensure that budgets are approved on time, because this will lead to bills being issued on time, in turn.”

Dubai is still in the infancy of streamlining the process of billing and collecting service charges from property owners. In many other jurisdictions around the world – such as markets like Australia, Singapore, and the US - these payments are on a regular cycle, usually monthly. But community managers can find it difficult to get budgets approved in time, because of factors beyond their control.

“Budget approvals are often a bottleneck, especially for the first invoice of a financial year,” Naser adds. “To approve a budget, managing agents need to get through tendering, awarding, sending out evaluation reports, managing auditor reviews, and so on; before the budget even gets to the final approval stage. So service providers end up getting thousands of Request for Proposal (RFPs) at the same time, forcing them to ask for extensions in submitting their bids, and this delays decision making for managing agents even more.”

One solution could be to get banks involved and financing installment payments at zero interest, which makes it possible for owners to adhere to a stricter payment schedule. Another possible initiative, which could help regularize service charge payments, is to approximate an initial payment, using previous payments, and leaving specific adjustments for subsequent billing cycles. RERA is already fast-tracking approval for budgets that are similar, or lower than, the previous year.

“Maybe the service charge of the previous year could be used as a baseline, and then reconciliation can be done later on – either as a credit or debit,” Francis suggests. “With digitalization, perhaps monthly service charge payments can be integrated into tools like the Dubai Now app - which brings payments for all your utilities and services into one payment portal - making it easier for managing agents and owners to meet their obligations promptly.”

Watch the complete discussion here

Digitalization can also add to the transparency of data, giving greater clarity to both investors and owners, by making the reserves and cash flow figures for property accessible to all stakeholders. A third-party data provider, backed by relevant authorities, can be used to avoid any conflict of interest. But variations across districts would need to be taken into account; so owners and managers are not incentivized to prioritize payments for properties in upmarket districts, where they face greater competitive pressures.

“The Dubai administration is acting on making systems data-driven, but we also need to compile this data into information, for stakeholders,” Dr. Mahmoud stresses.

Ironing out the kinks will require property-specific data

One of the issues with simply penalizing those already defaulting on payments – such as restricting them from buying more properties – are unintended secondary effects. Creating differentiated classes of investors and owners is likely to interfere with – and inhibit - the real estate cycle.

“Stakeholders in the Dubai real estate markets need to see delays in paying service charges as anti-social behaviour,” says Waqar Hasan, CEO of Itihad Community Management; “because it affects the everyday experiences and financials of your neighbours, the valuation and leasing of your building; and eventually, society at large.”

So what options does the market have? How do regulators and managing agents differentiate between an individual or entity that has been affected by temporary factors beyond their control and irresponsible actors? One way is to establish great communication with owners committees – who typically have their ears to the ground and can elaborate on genuine issues that are causing delays. Credit ratings can also be very helpful in determining the payment histories of individuals and organizations – to identify bad apples.

Disparities between the priorities of resident owners, who want more services at a good price; as opposed to investors, who are just looking at returns; also need to be reconciled.

This is where educating owners where the money is being spent, can play a crucial role – especially in the case of non-resident owners. Service charges can also be linked to indices and metrics that help evaluate specific buildings, although care must be taken that the location of the asset is not overly emphasised, because this can lead to distortions in markets.

There are no easy answers to resolving the service charge dilemma. But as Dubai prepares for the next cycle of real estate growth, informed voices and opinion-makers need to come together and unlock positives for the benefit of all stakeholders.