Annual service fee set to almost double in Dubai

Following an 87.5% hike, expert urges the government to regulate charges to reasonable levels

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By  Eudore Chand Published  February 19, 2005

Annual service charges have been raised by a whopping 87.5% by trendsetter Emaar Properties in one of its Dubai developments, The Greens. The move has encouraged others to follow the lead and accordingly, service fees in most developments are showing an upward trend from the AED 7-8 per sq ft that was being charged for 2004. Already, the developers of Marina Pinnacle have announced a service charge of AED12. Others are said to be almost double the 2004 level. Emaar, which had posted record net profit of AED 1.69 billion ($460 million) for 2004, has informed residents of The Greens that “after a careful review of the actual costs incurred over the past year, a major portion of which has been subsidised by Emaar, the service fee for the coming year (2005) has been calculated at AED15 (US $4) per square feet of owned property.” The fee for 2004 had stood at AED8 ($2.18) per sq ft. “Very simply, a service fee is charged for the maintenance, utility consumption cost and upkeep of common areas — basically everything outside the apartment. If it is too high, the property will not be attractive to buyers. Once the property is sold, the maintenance and upkeep of the properties must be borne by the owners. If it was initially set too low to benefit the sale, the developer must now try to recover his cost. It’s a double-edge sword,” explains David Cannon, a leading authority on service charge calculation and a specialist in property and facilities management. “It appears that an incorrect fee was charged in the beginning by the developer and now the customer has to bear the brunt,” Cannon told Construction Week, adding that whilst he has empathy for both the developer and the owner, “It is concerning to have an 87.5% hike in the second year. It was unexpected by owners who should not have to suffer such a dramatic impact. It is not an owner’s fault that the developer has made a mistake.” Property consultants said the upward trend is taking charges to more realistic levels. “These were committed more than a year ago. Now they are more realistic,” says Walter Hart, project consultant for Better Homes. Elaine Jones, managing director of Asteco, too felt that service charges are now rising to more realistic levels. “But these need to be very transparent. Homeowners should be allowed to check the books.” Emaar said its auditors Ernst & Young have checked the accounts for the service fee at The Greens and a copy of the same is available at the Emrill Facilities Management Office. However, the fact remains that the hike — and its wider impact — has resulted in belt-tightening for many new homeowners. “The development had attracted a lot of middle income group buyers, who had stretched their budgets to meet the monthly mortgage payments. If an average property is taken to measure 2000 sq. ft, its service fee has risen by a substantial AED14 000 a year or by AED 1166 a month “This is a major expense,” said an apartment owner. Cannon explained that the level of an annual service fee is a commercial decision by the real estate developer. They have to, however, take into account that a severe hike may put off future buyers, damage branding and erode brand loyalty. He said there are ways to ensure a lower maintenance charge. “One of the highest cost segment here is energy consumption. If at construction stage, more capital is spent on more energy efficient equipment and better design, it saves on long-term maintenance and energy consumption costs. “Energy efficient systems in a place where every drop of water is desalinated and where huge amounts of cooling are needed should be legislative and a best practice,” Cannon said, while pointing out that apart from what is paid out as service fee, the homeowner is still paying his own utility bills. “If service fee is high, it indicates systems can be using too much energy, which is also damaging to the environment,” Cannon said adding that if a developer adds to his core competencies by managing and maintaining properties through to perpetuity, he must really understand facility management in all its aspects and elements. “A hike in service charge that is not due to normal inflation has an economic impact. The government should be involved in such a critical decision,” Cannon said. He explained that the government must ensure that no single developer is allowed to raise service charges by such “huge amounts”. Developers also have to consider social responsibility versus profit maximisation. The government should regulate increases as rent increases are done by Dubai Municipality. There should be a mechanism for redress, Cannon added.

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