Property owners may get that ‘sinking’ feeling over fees

Property owners may get that ‘sinking’ feeling over fees

MAG Me Property Solution advises owners on ‘hidden’ depreciation costs of mechanical, electrical and plumbing (MEP) equipment

Owners of properties in the freehold areas of Dubai could be hit by major maintenance charges which should have been identified prior to purchase, according to the property management arm of a leading real estate developer.

“Some owners are jeopardising the return on their investments by not adequately accounting for depreciation on MEP equipment,” said Mazen Falhout, General Manager, MAGme Property Solutions, a division of the MAG Group.

Dubai property owners now have the opportunity to play an active role in the management of their properties as the new owners’ association management regulations, implemented by Dubai’s Real Estate Regulatory Authority (RERA) come into effect.

Full implementation of the regulations means that as well as routine maintenance and upkeep charges, owners will have to pay premiums to cover complete building insurance as well as an emergency reserve or ‘sinking’ fund to take care of larger maintenance work or replacement of essential equipment.

‘Sinking’ funds are essential to accumulate a reserve fund over time which helps to enhance not only the value of property for the current owner, but makes it more attractive for prospective buyers and the secondary market. It is also important that buyers verify whether such allocations have been made in the service fee budget before deciding to buy.

“When considering a real estate investment, prospective owners should always seek advice from professionals who can evaluate all potential operational costs, as well calculating depreciation or the appropriate deposits for a ‘sinking’ fund,” said Falhout.

“For example to replace a chiller in an average tower building costs around AED2-3 million, that amount must be built-in over ten years when it reaches the end of its working life. If there is no ‘sinking’ fund, owners have to foot the entire bill at that point of time which could be substantial,” he added.

As there is no conformity with common areas, each building or community must be assessed on a case by case basis, by professionals who understand maintenance of the complex engineering in these developments.

“In tower buildings it could be something as simple as electricity supply for lifts, air conditioning, pool chillers, lighting and even car park barriers. With rents falling at least 40% over the last 12 months, many owners are now faced with fees that they cannot simply pass on to tenants if they want to remain competitive in the market,” said Falhout.

“What might seem on the surface to be a good sales price may not be cost-effective over time, when the so called hidden capital and their respective operational expenses have been factored in.

“Prior to June 2008, investors did not care too much about service charges or operational costs, many were only speculating on the rising price. Now that party is over and owners now have to be responsible for their investments,”
added Falhout.

MAGme was specifically set up to provide an array of real estate management services from sales and marketing to property management and owners’ association management.

“Originally we were predominantly instructed to manage, promote and market the developed projects of our sister company, MAG Group Properties. However as we created business relationships with other developers we began to manage their buildings as well as advising investors,” said Falhout.

With so much stock to be completed over the next five years, Falhout believes that the property management sector will grow substantially over that period.

“It’s only natural. The cycle begins with design and investment, through to development, marketing and sales and then handover. Once that occurs owners must manage their property, irrespective of which way the market price is headed,” he added.

Although the macro economic factors such as the dollar-euro and dollar-sterling exchange rates are putting Dubai at a disadvantage at the moment, many Russians, Iranians, Indians and other Arab nationals are entering the market.

“Many overseas buyers are now looking for bargains, they are not concerned about market liquidity, they either have substantial deposits or the means to buy outright,” said Falhout.

Apart from falling prices, another reason for this confidence in Dubai according to Falhout is that Dubai is still way ahead of all other GCC real estate markets in terms of maturity, sophistication and regulation. “Any freehold property even comes complete with a complimentary world-class infrastructure,” he said.

Photo caption: For example to replace a chiller in an average tower building costs around AED2-3 million, that amount must be built-in over ten years when it reaches the end of its working life. If there is no ‘sinking’ fund, the owner has to foot the entire bill - Mazen Falhout, General Manager, MAGme property solutions, a division of the MAG Group.